Sunday, April 30, 2017

Stability Leads to Instability

"Look, we just want the money. You guys can walk away. We won't kill you."
--Jim (Hard Rain)

Snippet from a hedge fund CIO that views central bank policy as grounded in the stability motive. In the name of stability, CB actions have focused particularly on avoiding price declines. To the extent that they been successful, these policies have encouraged investors to sell vol at every opportunity.

As the author acknowledges, Minsky theorized that 'forced stability' thru policymaking distorts economic systems and creates moral hazard as investors take more risk than they should.

At some point, the illusion of stability lifts and the walls come tumbling down.

Intervention in the name of stability merely postpones future instability. That future instability is likely to be far more severe as well.

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