Is the modern, bank-light financial system better than the old one?

THE PARALLELS between rollercoasters and financial markets are plentiful. Both go up, both go down. A mountain-high climb is often followed by a stomach-churning plunge. And, on reaching the peak, some riders start to wonder whether they will make it off alive.

Listen to this story

Enjoy more audio and podcasts on iOS or Android.

The recent tumult in stockmarkets has brought the fairground metaphors flooding back. Should equity investors brace for a sickening lurch downwards? And as they plummet, will the groaning girders beneath them—the infrastructure underpinning markets—hold firm? The structure of finance has changed dramatically since the financial crisis of 2007-09. Every new big-dipper has to go through rigorous testing to ensure it is safe to ride. Post-crisis global markets may be about to experience a wrenching stress test of their own—though with cars packed not with dummies but actual people.

For almost two years after markets recovered from a brief but vertiginous slide when covid-19 spread globally, investing was a scream. Much fun was had bidding up shares in Hertz, a bankrupt car-rental firm; engineering a short-squeeze in shares of GameStop, a video-game retailer; and piling into cryptocurrencies, including dogecoin, a joke one. With markets so buoyant, picking winners was like shooting fish in a barrel. Stocks, particularly those of tech giants, were supercharged by the Federal Reserve’s announcement in March 2020 that it was cutting interest rates to zero and would begin buying Treasury bonds and other assets. The S&P 500 reached all-time highs on 70 of the 261 trading days in 2021. Only in one other year, 1995, has it reached a greater number.

The laughter is not so loud now. On January 27th the S&P 500 closed in correction territory,

Read More