What happened to risk?
A question no doubt in some of my readers minds.
In relation to financial markets, investing and business it seems to be an archaic concept only seen as a entry in the Oxford dictionary.
The market turmoil that started with the Sub Prime fallout and associated credit crunch, several months ago, has highlighted what has been going on for many years, those that take risks in business and investing no longer seem to suffer consequences when the risk that they took doesn't quite give the expected payoff.
After global State bailouts of banks with "liquidity" problems and talk of sub prime borrowers being bailed out or their bad decisions to buy houses they could ill afford, the latest avoidance of risk involves the insurance companies that insured sub prime bonds against collapse.
For goodness sake you want to remove risk from insurance?
Let me borrow and modify a classic Tom Cruise flick, insurance is risky business!! Please don't sue me Tom.
The talk of a bailout last week led to US markets doing a Lazarus and finishing up by around 2.5%.
It ain't a positive investors, its a pure unadulterated negative.
The investing world isn't the only place risk and consequences has been removed from life, Governments worldwide have been trying to do this for years.
In New Zealand Helen Clark, and her merry bunch of Labour Party socialist risk aversionists have recently passed a law to allow citizens to easily declare bankruptcy and come out of it without paying back debtors. This is linked to student loans that don't attract interest and therefore students have no incentive to pay them back.
All risk taken and no consequences for that risk.
Over the last 9 years Aunty Helen has bubbled wrapped an entire nation so much so that the risk that she talked about when she gave a eulogy at Sir Edmund Hillary's Funeral has almost been completely removed.
When we remove consequences for risk though, we increase the risk that mistakes will continue to occur.
Those in the financial industry being bailed out, institutionally and individually are simply going to continue to do what they have done if there are no brakes on their behaviour.
The looming danger is ironically low interest rates, what led us into the whole sub prime fallout and reckless borrowing and lending in the first place.
Record low rates after 9-11 led to a frenzy of cheap credit and with similar low rates coming down the pipeline one doesn't have to be a Warren Buffett to figure out that this is not such a good thing at all.
Related Share Investor Blog Reading
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Credit Crunch a blessing in disguise
Global Credit Squeeze: There is no free lunch
Related Political Animal Blog Reading
Labour's Socialist Peril
C Share Investor 2008
Monday, January 28, 2008
What happened to risk?