Central banks’ ultra-loose monetary policies encourage business to invest in suboptimal projects.
Creative destruction, the mainspring of capitalist dynamism, has been anaesthetised.
Also worrying is the potential for a repeat of the Long-Term Capital Management hedge fund’s near-collapse and bail out in 1998. No doubt most investors assume the Federal Reserve will come to the rescue if an ailing hedge fund looks too big and too interconnected to fail.
But therein lies much of the explanation for all those Alice in Wonderland valuations.
John Plender FT 1 February 2021