Too much risk? - Interfluidity

Summary:
Steve Waldman argues against the conventional wisdom that the financial system took on "too much risk" in recent years. Hundreds of billions of dollars were poured into new suburbs, while very little capital was devoted e.g. to the alternative energy sector. Capital was withdrawn from a variety of industries deemed "uncompetitive", because to gamble on recovery is far too great a risk. Big central banks, whose investment largely drove the credit boom, were (and still are) seeking safety, not risk. The housing boom was born less from inordinate risk-taking than from the unwillingness of investors to take and bear considered risks. Huge institutions are treating the financial system like a bank: depositing trillions in generic "safe" instruments and expecting wealth to somehow appear. A generation of professionals were trained to forget that investing is precisely the art of taking economic risks, then delivering the goods or eating the losses. Investors' childlike demand for safety has made the financial world terribly risky. We must not pretend that risk can be regulated or innovated away. (Published: 07/08/08)