The years leading up to the financial crisis were characterised by, inter alia: high levels of financial innovation; an over and incorrect reliance on implicit and explicit assumptions; the approach to regulation and supervision failing to keep pace with the growing systemic risks; and boards and senior managers not truly understanding the risks and, in many cases, the underlying activities being undertaken in their businesses.
And weighing those odds is what policy is all about: Making choices in real time, using incomplete knowledge of future asset market behavior, and weighing potential costs and benefits for economic performance over time from alternative policy strategies. By lowering interest rates aggressively, the Federal Reserve undoubtedly has shifted some forms of economic activity from the future to the present.