But the problem with this apparently benign environment was that it made things seem just a little too easy. As the period of stability grew longer, so compensation for risk tended to diminish as investors continued their “search for yield”. In the end that search explored some fairly remote territory, including complex structured products, exotic derivatives and so on.
Key sectors of important economies accumulated a considerable degree of leverage along the way – in households, or financial institutions or both. In other words, as the macroeconomic environment seemed less risky, people changed their behaviour. The macroeconomic stability provided scope, it seems, for some financial trends to run further than they might otherwise have done, and further than they really should have done.