A Decade of Delusions: From Speculative Contagion to the Great Recession

Preface

Speculative Contagion: An Antidote for Speculative Epidemics was first published in 2006 and originated from my fascination with and skepticism about the widely embraced “Great Moderation,” an economic era of predictable policies, low inflation, and tempered business cycles. The origins of the Great Moderation can be traced back to late 1987, when the economy barely flinched after the shock of the Dow Jones average’s unprecedented and infamous 23 percent freefall on October 19. Quick intervention by Alan Greenspan, Federal Reserve chairman, who had been confirmed only two months before, likely stemmed the tide. But in doing so, he established an oft-repeated enabling precedent for what became known as the “Greenspan put,” an implicit government guarantee against the consequences of financial and economic crises.

The original Speculative Contagion, its title a loud and clear warning bell, was published 18 years into the Great Moderation. Little did we know it was going to be a premonition of what two years later became known as the “Great Recession.” During the prolonged spate of generally stable times, apprehensions about risk gradually faded as the economy—along with the market prices of popular asset classes of stocks, bonds, and real estate—continued to trend inexorably upward. The momentum of invincibility was so entrenched in the popular psyche that even the bursting of the “Great Bubble” in 2000–2002 did not restore an abiding respect for risk.

As Speculative Contagion ...