The stock market gyrations last Thursday may be a nice example of the issue of complexity I’ve discussed in the past. When the financial markets are too hard to understand, failure modes become unpredictable.
Because there is profit in complexity, or at least the chance of profit, we can expect more of this going forward. History suggests that there will be a slow and intermittent increase in complexity and volatility, up to some limit where ordinary investors are no longer willing to tolerate it. The government will increasingly try to guarantee the behaviour of the financial instruments used by ordinary people: bank accounts and 401k plans. High finance will increasingly separate from ordinary finance, as indeed was the case in the past.
My guess is that we’re headed for a cycle of booms and busts more like the ones in the last 19th century. The money that comes from complexity has a lot of influence over the political system, and people are working hard to avoid regulations which smooth things out while lowering profits. At the same time the government may increasingly intervene to keep finances stable for most people. E.g., although Fannie Mae and Freddie Mac will most likely disappear, there will be some new mechanism for controlling home mortgage interest rates.
Hard to say how it will all work out, but whatever happens you heard it here first.