Nothing fails like success, we are often old half seriously. Yet we argue that the most formidable challenge for market economies is not this is or that weakness or defect that can be reformed away. Rather, like some individuals we may know, the biggest weakness of capitalism arises from its greatest strength. Capitalism has unleashed our species creative and productive forces like no other system.It has conquered scarcity, reducing labor devoted to providing the essentials of life, like food and shelter.  

The US, and to a lesser extent Europe and Japan, have built extensive financial markets. The savings, which are not needed to produce goods and services, are transferred to the financial sector where they are invested paper assets. The flexibility of the capital markets also served as shock absorbers so the real economy did not have to as much.If the price of money (interest and exchange rates) could adjust, unemployment and growth would not have to, so ran the logic.  

Indeed, following the double dip economic downturn in the early 1980s, there was an extended period that some economists dubbed the Great Moderation. The business cycle was not repealed, but it had a smaller amplitude and shorter duration, and the new flexibility of the capital markets arguably played a critical role. However, as Minsky’s work suggest, stability generates instability. Financial innovation, increased leveraged that was facilitated by deregulation, and gaming of the remaining regulations, plant the seeds for eventual downturn.  

In this context, the Great Financial Crisis demonstrated that shifting the volatility from the real economy to the financial markets can create a feedback loop and the volatility of the latter than impact the former.  The policy response has been to strengthen the regulatory environment. The ink on Dodd-Frank, for example, was hardly even dry, before the push back began. Many observers are concerned that the way out of the Great Financial Crisis was to create new asset bubbles, like in equities and bonds.  

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