Financial conditions, alternative asset management and political risks: trying to make sense of our times

Developments in the financial sector have led to an expansion in its ability to spread risks. The increase in the risk bearing capacity of economies, as well as in actual risk taking, has led to a range of financial transactions that hitherto were not possible, and has created much greater access to finance for firms and households. On net, this has made the world much better off. Concurrently, however, we have also seen the emergence of a whole range of intermediaries, such as hedge funds, whose incentive structures can lead them to take more risk, especially in times of plentiful liquidity and stability. As a result, under some conditions, economies may be more exposed to financial-sector-induced turmoil than in the past. I highlight concerns about the political spillovers if such instability arises.