The Source of Systemic Crisis: Risk and Moral Hazard

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The Source of Systemic Crisis: Risk and Moral Hazard

Postby Indaswamp » Wed Aug 21, 2013 12:40 pm

Great read....(and for Assateague, this debunks the 50/50 theory too. :wink: )
http://www.oftwominds.com/blogaug13/risk-moral-hazard8-13.html
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Re: The Source of Systemic Crisis: Risk and Moral Hazard

Postby ScaupHunter » Wed Aug 21, 2013 2:23 pm

50 : 50 it doesn't prove 50 / 50 wrong. :devil:
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Re: The Source of Systemic Crisis: Risk and Moral Hazard

Postby Indaswamp » Thu Aug 22, 2013 12:02 am

continuing...
The central illusion of finance is that risk can be magically reduced to near-zero. To repeat: risk can only be offloaded to others, either openly or by sleight of hand; it cannot be disappeared.

The Grand Experiment: Offloading Risk onto the State

Here is the progression of risk management:

1. Risks from the natural world were transferred to voluntary private insurance and financial markets;

2. This transferred risks inherent to Nature and capitalism to the financial sector of the economy;

3. Financial crises in the early 20th century led to financial risk being offloaded onto the state;

4. The risks intrinsic to capitalism and finance led to demands for pension and healthcare social insurance by the state.

Since risk cannot be eliminated, only offloaded to others, this transition of risk management from private to state has essentially concentrated risk into the state itself.


And here is the crux of the article, and why I post these threads....

Insurance based on piling up contributions from participants into giant pools of capital that must earn market returns to fund disbursements are exposed to the risks intrinsic to capitalism and finance. The risks are not being spread to participants so much as transferred to the market. If the speculative bubbles in stocks, bonds and real estate collapse, all the pension plans based on investment returns (and that includes life insurance companies) will be exposed to enormous risks of insolvency.

In other words, pension plans based on sustained high rates of return from investments in intrinsically risky markets are at great risk of failure, as the plan's payouts are dependent not on distributing risk to all participants but on sustained high yields from intrinsically risky investments.
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