![]() As a result, long-term risks imbedded in balance sheets were not assessed, quantified or managed. This lack of historical perspective on risk was combined with a myopic focus induced by compensation heavily weighted towards short-term performance. ![]() #FED SPEEDDIAL FULL#They were replaced by a generation of financial managers who grew up never seeing a full blown financial panic or a deep economic recession. The risk managers who had lived through the turmoil of the 1970s and early 1980s had retired. Financial participants I talk with acknowledge that during the Great Moderation, risk-management processes and procedures became less disciplined. This period came to be known as the “Great Moderation,” a moniker that deliberately contrasts with the “Great Depression” of the 1930s. The 23 years before the recent crisis were characterized by a low level of business cycle volatility that was virtually unprecedented. As a result, the economy becomes less resilient to the next big shock. The discipline of risk management atrophies risks are underestimated and underhedged. ![]() During periods of quiet, market participants become inattentive to assessing, quantifying, and managing risk. Minsky’s key insight was that times of economic quiescence can encourage behaviors that often lead to the next period of turbulence. This conference honors the work of Hyman Minsky, a scholar who devoted much of his study to understanding the nature of financial crises. ![]()
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