Paul Volker gets it:
Larry summers, who would later serve as treasury secretary to bill Clinton and adviser to Barack Obama, had a theory. Technological and financial innovation, he told the group, had indeed made finance more bubble prone. He sketched out a scenario of how a crisis and deep recession could recur. Still, he concluded, since the Great Depression, the federal government had erected firewalls between the financial system and the real economy where ordinary people worked and invested: the vast federal budget, deposit insurance, and most important, an activist Federal Reserve: “it is now nearly inconceivable that there would be no active lender of last resort in time of crisis.”
The next panelist, Hyman Minsky, a professor at Washington University in St. Louis, for decades had flogged an iconoclastic theory of business cycles that fellow scholars had largely ignored. Since the 1960s, he said, the authorities had staved off another depression by reacting to every crisis with some combination of government borrowing and Federal Reserve lending. But each success, he warned, simply compounded the behavior that made the system crisis-prone. “Success is a transitory phenomenon,” he warned. He conceded, somewhat grudgingly, that “transitory” could last an awfully long time. It had been some fifty years since the last depression.
The last speaker on the panel was Paul Volcker, who had stepped down two years earlier as Fed chairman. He agreed with Summers that the world had more tools for dealing with crises. But his own take was closer to Minsky’s. He drew attention to a cartoon in that morning’s Boston Globe pegged to the Fed’s promise to pump money into the economy. It portrayed a dollar bill marked “United States of Amnesia.” “We seem to be on something of a hair trigger in using these tools,” he observed. “This leaves me with the disturbing question of whether by using these tools repeatedly and aggressively we end up reinforcing the behavior patterns that aggravate the risk in the first place.”
Trend following will be the winner next time. And next time. And next time…
Source: Greg Ip, “Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe.”