That Rumbling in Your Portfolio? It's Real

There’s a reason markets feel more volatile: They are.

Seesaw sign at a playground
By SHARE

A critical difference between Minsky and other scholars of market extremes is that Minsky is not primarily concerned with market manias. "In Minsky, everything that's being done can be completely rational," says L. Randall Wray, a University of Missouri—Kansas City professor who studied under Minsky in the 1980s. "Everyone is profit-maximizing, innovating, working to get around regulations and supervision."

[See Are You Vulnerable to Computerized Markets?]

What's more, Minsky contended, extremes in financial markets are not just occasional and incidental; they are inevitable. "That's what economics has persistently and consistently gotten wrong," says Wray. "Their belief is that market forces are stabilizing, and Minsky's argument is that market forces are destabilizing because normal profit-seeking behavior is what leads to this fragile position."

That financial markets are inherently destabilizing is worrying enough. Mix in a political culture that says the best regulation is no regulation, and the 16-year-old doesn't even need a license. In the United States, many argue, the abdication of regulatory authority and the "financialization" of the economy in recent decades explains the frequency of market extremes in the past generation.

One telling metric: The financial industry accounted for about 3 percent of GDP in 1960, but about 8 percent in 2008. For the lurid details of getting to 8 percent from 3 percent, Cooper Union professor Jeff Madrick's Age of Greed is a good place to start.

Meantime, unless Congress decides to reign in the financial industry like it did in the 1930s, there's no reason not to expect more portfolio chills and thrills during your investing lifetime than your grandparents expected in theirs.

To put it another way: You, Dodd-Frank, are no Glass-Steagall.

Corrected on 08/29/2012: A previous version of this story misspelled the name of Justin Bieber.