The trouble was, the bankers actually believed their own narrative of risk-reduction and convinced regulators that by re-parcelling risk and selling it on to investors, they were actually making the global financial system safer.
I\’d be amazed if anyone thought that risk had been reduced. Re-allocated, yes.
And that re-allocation did indeed make the global financial system safer.
For precisely the point was to re-allocate risk. We\’ve seen German banks go bust as a result of events in the US housing market. That\’s very definitely a re-allocation of risk.
And of course such re-allocation is the very purpose of all financial markets. Stock markets exist so that many people (millions in large companies) can share the equity risks of running a company. Insurance markets exists so that millions can again share the risks of unlikely but hugely expensive events. Bond markets so that again, the risks of loans can be sliced and diced and spread around. Instead of one person taking the entire risk of that $50 million loan to some upcoming busines idea, 50,000 people can take a risk of $1,000 each.
Banks too exist to spread risk: I\’d be most unhappy to be funding my neighbour\’s (or someone in Nevada\’s) mortgage directly, even thogh such arrangements are possible. But I\’m a great deal happier to be funding some fraction of 100,000 peoples\’ through my deposits into a banking system.
This isn\’t to say that everything is peachy, far from it. It\’s just that it seems to me a little odd to complain that the financial system did what we all want it to do: spread risks.
Indeed – the small US banks that are failing now are generally the ones who *didn’t* spread risk, and didn’t securitise their loanbooks…
All of the risks exist independently. But some increase (nearly imperceptibly) simply by the mere act of spreading them around.
But the underlying weakness is “management” by authority of the monetary quantities in an attempt to achieve lower-than-prevailing rates of (originary or basic) interest. The driver here is the fact that interest is not a set “premium” but a percentage, requiring a compounding of the rate with each future iteration–merely to maintain the lowering effect previously achieved. Once started, the only options are to stop (and precipitate recession) or to continue (toward some unpredictable endpoint of monetary worthlessness).
The whole idea (or psychology) behind the process is to ENCOURAGE risky entrepreneurial behavior. “Boom” times are always experienced favorably by politicans in power–both with the general voters and with the special classes (many times of the pols’ friends and associates) whose prospective ventures are signally benefited by the easier credit regime. It is no surprise whatever, that as the process progresses, ever-weaker prospects will appear not only do-able but nearly mandatory. (Remember–banking and f’rinstance, mortgage-brokering and packaging–are also competitive enterprises and the arena for competition is the ever-weakening total of
obligation instruments. Those who are actually prudent are punished in the marketplace–no matter how correct they shall have appeared to be in hindsight.
There is no fix possible–only the construction of wider pools and innovative instruments to achieve the risk-sharing increase required. The worst part is that the more successful are the “patches,” the more widespread and severe will be the collapse that eventually occurs.