Could it be that the monetary policy experiments after the Lehman crisis did more harm than good? That was the view of PIMCO’s ‘Bond King’ Bill Gross, who, displaying his own science credentials, suggested that just as Newtonian physics breaks down at the speed of light, so a market economy ceases to function normally when interest rates approach

‘In physics, escape velocity refers to the speed necessary to escape from a planet’s gravitational pull,’ remarked the Bank of England’s Governor Mark Carney in early 2014. ‘The economic analogue is the momentum necessary for an economy to escape from the many headwinds following a financial crisis.’3 With these words Carney justified keeping the

The central irony of [a] financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending. Larry Summers, 20111 Will they [central bankers] not consider the possibility that ultra-low nominal yields

If liquidity represents the ability to trade securities without moving their prices, volatility measures the price movement between trades.

A blind, unquestioning hunger for yield revived the moribund subprime market. Janet Yellen claimed the Fed’s intention was to help ordinary people by making homes and cars more affordable. This time around subprime loans went to car buyers with poor credit scores rather than homebuyers. ‘Auto receivables’ – short-term debt securities originated and

Modern finance theory states that this shouldn’t be the case. But investors ‘have a deeply ingrained notion that saving is the preservation of wealth and wealth should grow at a “decent” rate’. They won’t accept a loss of income.

Walter Bagehot understood that investors are prone to behave rashly when interest rates fall below a certain level. A desire to maintain the income of their investments induces them to speculate.

Capitalism is an economic system which both rewards and punishes people for taking risks. Homo capitalisticus is a risk-taker, and a stable economy requires that risks are correctly priced. When the price of risk is set too low, too much risk is assumed, new risks multiply and the financial system becomes unstable.

Our alternative ‘iron law of inequality’ can be annotated as r < g, with r signifying the rate of interest and g the economy’s trend growth. This formula, which is the inverse of Piketty’s, can explain both changes in the distribution of income and wealth during the 1920s and the rise in inequality since the 1980s and, in particular, the Great