Financial Times: After ignoring the accumulation of risks comes panic

Good column in the Financial Times today on "Mr. Market" - where success breeds excess, where short term stabilizing policy actually leads to long term instability, and where unchecked credit-fueled speculation leads to financial collapse.

Yes, it will all seem so obvious looking back on it. I have never been more convinced that this worldwide asset and credit bubble has turned the corner, and an ugly fall and unraveling is now underway.

Benjamin Graham, Warren Buffett’s teacher, used to warn that the person he called “Mr Market” is a neurotic: his moods fluctuate between incredible optimism and overwhelming depression. At present, he is moving from insouciance to anxiety and so from riskier assets towards cash or even that classic hedge – gold.

One thing, as Mr White notes, history makes clear: “a preceding period of price stability is not sufficient to avoid serious macroeconomic downturns”. High inflation did not precede the great depression of the 1930s, Japan’s lost decade in the 1990s or the emerging market crises in east Asia in 1997 and 1998. What preceded all these extreme events were credit-fuelled investment booms in an era of stable inflation.

I am inclined to think that policymakers should take some account of emerging financial imbalances – including growing indebtedness – in monetary policy. In any case, the wise investor cannot ignore such developments. In the expansionary phase a euphoric Mr Market will always ignore the accumulation of risks. But sooner or later he will wake up to them – and promptly start panicking. It is what he is doing now. He is, after all, only human.