But the Great Moderation was not the new normal. It was a pause — a deceptive lull in history’s recurring cycle of instability. When the 2008 financial crisis struck, the supposed mastery of volatility dissolved overnight. What followed was a series of crises that revealed the deeper truth: the global economy is not a smoothly managed system but a regime-switching one, prone to sudden jumps from calm to chaos.

The Illusion of Mastery

The Great Moderation was celebrated as proof of central bankers’ skill. The U.S. Federal Reserve and its peers were credited with fine-tuning interest rates, anchoring inflation expectations, and following “Taylor-rule” type strategies that smoothed fluctuations. Economists wrote papers declaring that volatility had been tamed.

Yet this stability owed as much to structural forces as to policy genius. China’s integration into global trade depressed prices, boosting purchasing power in the West. Demographic tailwinds in advanced economies, coupled with ICT-driven productivity gains, created benign conditions. Policymakers mistook these exogenous trends for the fruits of their own prudence. It was a dangerous hubris.

Financialization and Hidden Fragility

Behind the calm surface, financialization was transforming capitalism. The explosion of derivatives, securitization, and shadow banking shifted risks off bank balance sheets and into opaque markets. The narrative of “risk dispersion” suggested resilience, but in practice fragility was simply migrating into places regulators did not monitor.

Household leverage rose, asset prices inflated, and banks relied on wholesale funding vulnerable to sudden stops. The Great Moderation muted volatility in output but amplified fragility in balance sheets. Stability, in other words, was breeding instability — a paradox Hyman Minsky had warned about decades earlier.

The Political Economy of Moderation

The political consequences of the Great Moderation were equally profound. Asset holders thrived as financial wealth ballooned, but median wage growth stagnated. Inequality widened quietly under the cloak of stability. The calm became a cover for structural imbalances: housing bubbles, corporate concentration, and fiscal complacency.

When the calm regime ended in crisis, the backlash was political. Populism surged, globalization came under attack, and trust in institutions eroded. The Great Moderation had not only failed to prevent instability; it had incubated the conditions........

© The Times of Israel (Blogs)