Monday, September 15, 2008

Ignoring financial risk comes home

The savings and loans debacle, the sub-prime loan mess, and the current collapse of brokerage firms have their root in one thing - the attempt to mask investment risk. By allowing investment companies to mask the riskiness of their investments either by repackaging bad loans or relying on the backing of the government have only replaced short term risks and smaller downturns with big ones that come less frequently. It is time to remove the abstraction and let the riskiness of investments become naked for all to see without any significant assurance of the government bailing them out. Let each bad loan and investment fail and hurt those who made them directly. Forget all this layer of bureaucracy that tries to hide or push back the bad news.

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