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.