Markets Show They Aren't Prepared for the End of Stimulus

Quantitative easing saved us from the 2008 crash and jump-started a recovery. It also encouraged a build-up of one-sided risk in the financial system. Are markets and the economy ready for the exit?

The sudden rise in volatility in February and March showed that even with strong growth fundamentals, financial markets remain vulnerable. Since 2008, there have been seven flash crashes followed by sudden recoveries. Volatility has become binary, with markets swinging between periods of shock and calm. The VIX index traded at a median of 16 after the start of QE and at 18 before, but the spikes in volatility have become twice as frequent. It is the equivalent of swapping a stable drizzle rain with many days of scorching sun, at the price of occasional natural disasters.