The Risk of Becoming Risk Averse in a Post Financial Crisis World
Some Federal officials and others from sectors that are removed from day-to-day commerce want to blame risk takers, represented by Wall Street investment bankers, for high unemployment and frozen financial markets, and certainly risk exploded during the decade leading up to 2008. While Wall Street firms need to bear their share of the responsibility for participating in risk-run-wild, there is plenty of blame to go around, including government policies before and since the liquidity and credit crisis hit in late 2008.
It is important now to fully diagnose the reasons for our recent economic woes and pass regulation that helps identify the size and nature of systemic risk in the future. It needs to start with governmental policies, federal, state and local, that interfere with the normal market-driven risk and reward mechanisms that have controlled free enterprise from its inception. Risk rating agencies need to be truly independent in the future. Corporations must do a much better job of assessing the risks they create or support in the marketplace. In addition, American consumers need to be better educated in economics and free enterprise so that they can detect risk in offers that are too good to be true.
FDR is often quoted as saying in his first inaugural address, “The only thing we have to fear is fear itself.” We need to remind ourselves of this wisdom in these times of frozen job markets and banks. One of the primary tenets of capitalism is “no risk, no return.” Fear of risk has things frozen. It is time to take measured risks again, not the senseless risks we saw in the mortgage funding government policies or mortgage-backed securities that could never have produced a lasting return, but reasonable risks that produce reasonable, long-term returns.
One of our greatest risks at this point in the history of our great nation and its great economy is, as FDR put it, the “nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.” We risk becoming so risk averse that we will never move ahead. Government needs to stop punishing and get out of the way of growth. Banks need to make loans in support of reasonable new ventures. The unemployable must learn new skills. Corporations need to expand and hire people to grow their businesses. The global market will make a comeback if we don’t let our fears of risk prevent it.
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