Risk and Moral Hazard

[imoldernu]

A dscussion... the source of systemic crisis.
charles hugh smith-The Source of Systemic Crisis: Risk and Moral Hazard
We don't have to agree or disagree, to read a viewpoint. I would point out the CHS is an oft read blogger who has, for the past several years that I've been reading his thoughts, been negative on the economy... Still, it may be helpful to hear about these alternate theories.

 

[ERD50]

I thought it was an interesting read. Two points that I thought were good summaries:

The key to understanding risk is to ask where it is being offloaded. Risk cannot be disappeared, it can only be transferred or cloaked. The question is: who is it being transferred/offloaded to? What are the consequences of risk pooling up in these reservoirs?

This is something I've been trying to tell some people. You can't eliminate most risk, only transfer it - for a price. And who is going to take it w/o charging you a healthy profit? Though pooling risk can have benefits.

bold mine:

Where does all this lead us? To this: Programs that backstop banks and social insurance systems like Medicare are not like fire or life insurance because they are effectively open-ended in terms of costs and in exposure to risk. A system which pools risk without distributing it to the participants and eliminates the causal connection between risk and consequence introduces moral hazard on a grand scale.

You need to read his discussion of fire insurance to get the full gist of that, but it says a lot.

-ERD50