We think the US financial system still suffers from the same structural weaknesses as it did in 2008. These weaknesses are:
- Perverse incentives (investors making bets with other people's money avoiding negative consequences when these bets go wrong, central banks forced to interventions increasing moral hazard, etc.).
- Excessive leverage.
- Excessive complexity (Frankenstein derivatives that hide risk).
This is not a serious problems in good times, but things are taking a distinct turn for the worse, opening the prospects of serious financial stress emerging.
It is perhaps a little early to start predicting Minsky moments, where