"WHY did nobody notice it?" the Queen famously asked after the 2008 credit crunch.
A few years after this we were sitting in a London cafe pondering a similar question. In fact, we were discussing a basic paradox in economics and finance. All the major schools of economic thought have an underlying premise that, over the long term, the forces of supply and demand reach an equilibrium and converge around a relatively stable middle point. In a similar way, the concept of "fair price", where the value of an asset reaches a middle point at which a buyer and seller agree, is a cornerstone of finance theory. According to these theories, financial crises arise when the system deviates too far from the equilibrium or fair price. Detecting the emergence of a crisis should therefore be easy, since we need only to track the distance of key metrics from equilibrium. ...
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