Robert Merton – one of the architects of modern financial theory – once said: “Any virtue can readily become a vice if taken to excess, and just so with innovations”. 8 When – and how – can finance turn into a source of instability and economic regress? My answer is simple. When function 2 is ignored, and functions 3, 4 and 5 are abused.
The unemployment rate is near the lowest level recorded in 50 years, and average monthly job gains have continued to outpace the increases needed over the longer run to provide jobs for new entrants to the labor force. Average hourly earnings are showing a welcome increase consistent with a healthy labor market, yet inflation remains near our 2 percent objective.