The writer is the Dean of Queens College, Cambridge University and an advisor to Allianz and Gramercy

I clearly remember a meeting with the head of a major US bank in late 2007. In response to my inquiry about the state of the financial market, the executives drew an inverted U shape. When told that we were close to the peak, I immediately asked the bank’s risk positioning. “Maximum risk” is a rather surprising answer.

Of course, is it wise to reduce risk before the expected turning point? No, someone told me. The bank needs “clear evidence” to prove that the market is changing its strategy. After all, it is difficult to determine the timing of the turning point, competitors are also exposed to great risks, the bank is worried about short-term underperformance, and the authorities did not sound the alarm. As a result, the bank had to be rescued in the 2008 financial crisis.

Today, the agency (held by different CEOs) has more capital and is more restricted in terms of risk-taking. But the mentality and risk-taking behavior in the game have not disappeared. They have transformed, migrated to non-banks and grew in non-banks. In addition, until recently, the central bank and other regulators remained on the sidelines and acted as facilitators of negligence.

Although the systemic threat exerted is relatively small, the financial system is vulnerable to market accidents, exposing the economy to unnecessary risks.This year, the system has resolved three near-unexpected incidents: the sudden increase in revenue in January; February Retail uprising Focus on retailer GameStop; and March Die out Archegos, a little-known family office, caused known bank losses of approximately $10 billion.

In all three cases, the destructive spillover effects of the financial system are contained by luck rather than crisis prevention measures. In the absence of any evidence other than a temporary interruption, the central bank’s provision of liquidity encouraged great risk-taking.

This is accompanied by a large number of opportunistic positioning of some investors-hedge fund manager Leon Cooperman (Leon Cooperman)’s cleverly worded view fully illustrates this approach, he believes he is a “Fully Invested Bear”.

However, the driving factors of these nearby accidents cannot be ignored. They are part of the dry fire, and if ignited, they may cause subsequent financial accidents. Fortunately, inflation and financial instability have shocked the central banking community.

As usual, the Bank of England is one of the recent leaders statement The “continuous purchase” of assets under the quantitative easing program may now slow down. This laid the foundation for future interest rate hikes.

For its part, the European Central Bank caveat There was a “significant boom” in the market last week, which added to the small early signs that many people thought unbelievable: the European Central Bank may curtail its quantitative easing policy in front of the Federal Reserve (Fed).

Fed officials almost universally adopted a series of common views, thereby dispelling concerns about inflation and reiterating that the Fed “has not considered downsizing.”However, the minutes of the Fed’s policy meeting Published It was said last week that some officials wanted to talk about this possibility in an “upcoming meeting.”

The good news is that the Fed can now consider policy revisions, which will help reduce the possibility of policy incidents similar to the mistakes made by banks in 2007-08.

The minutes of the meeting indicated that only a few members of the Federal Reserve Policy Committee were present, which is a bad thing. And it doesn’t seem to include chairs. The timeline is vague and open. No wonder the market pays little attention.

The Fed has waited too long and therefore faces a tricky policy hub-especially at the moment Now hostage A “new currency framework” that is not suitable for changes in the economic structure associated with the pandemic.

Therefore, this hub involves the dual risks of market turmoil and loss of the Fed’s credibility. However, alternatives that single-handedly insist on a non-forward-looking policy stance will threaten greater losses.

As far as investors are concerned, they should encourage the Fed to take action and not just focus on the continued pleasure of responding to the liquidity wave. To learn from the experience of the bank in the financial crisis, it is best to take some short-term uncomfortable risks, rather than accepting greater policy errors that will bring lastingly greater asset value, market operation, and economic and social well-being. damage.