In financial markets, volatility is low, as are spreads on corporate debt over treasuries. It is not hard to see why many market participants would feel that things have never been safer. But we should remember that it is in these circumstances where the biggest mistakes can be made.
When everyone feels that risks are at their minimum, over-confidence can take over and elementary precautions start to get watered down. In addition, competitive pressures from those who under-estimate risk can push even the more prudent institutions into actions they will later regret. Let me illustrate this point in relation to household borrowing.