There is no way of avoiding risk entirely but one way of mitigating risk is to diversify it away. Instead of buying one stock, we buy a mutual fund that owns dozens or hundreds of stocks. Ditto with bonds and so on. Even savers often spread their cash among several banks to stay within the FDIC limit.
Systemic risk is encountered when not just one stock, one bond or one bank goes bad, but the entire markets for stocks and bonds goes down, or the entire banking system goes bust. As Richard Fernandez points out, when the government takes over and replaces millions of individual choices with one “standard” choice, the potential for catastrophic failure becomes very, very large.
One of the arguments for centralizing power in government is that it reduces variance. People get ’standard’ care, which is ‘equitable’ and predictable. This is contrasted with the wider distribution of outcomes when the same decisions are left to individuals. In the health care debate for example, there are people who obviously get great health care and others who get relatively bad insurance. Wouldn’t it be better if the variance were reduced by a government program?
Left out of this argument is the idea of systemic risk. Leaving decisions to individuals makes it unlikely that they will all get it right but it equally implies they almost never get it all wrong. Society based on individual choices has a diversified portfolio of outcomes. In contrast if a government gets it wrong, it goes spectacularly wrong. Let’s forget about Fannie Mae and Freddie Mac for a moment; turn our eyes away from Barney Frank and look across the Atlantic to the UK’s ironically named Office of the Public Guardian. (click on the link for the rest).
What happened in the financial crash of 2008 was not an issue of lack of regulation. It was an issue of government encouragement of mortgage borrowing not supported by the ability to pay; a standard that was created de-facto by government policy and incentives. The government created a systemic risk – without realizing it – that almost destroyed the world’s financial system.
2 comments:
| When a social worker tells a 67 year old diabetic that he can't get his SNAP food credit increased ( even though dietic food costs 35% more on average), you know something is terribly wrong:
My niece and her husband live in Richmond, KY. They were turned down for a SNAP Food credit increase ( He's diabetic and they both live on his SSI). Which would you prefer: An extra $100 for dietic food, or $180,000 a month for Hospital costs if or when John has a Diabetic blackout or slips into a Coma? Taxpayers already pay for his SSI and VA, so its your decision. If Obama wants to prevent complications associated with diabeties, obesity, and other ailments, wouldn't it make sense to issue specified food vouchers/ Dietic foods/Care boxes to VA clinics,Food pantries and other institutions that address the needs of Low income Americans? Why is it that Government Commodities ( often delivered to Non Profit Organizations) are extremely high in Sodium and Carbs?
Worst of all, not ONE version of the Healthcare proposals include incentives to encourage responsible, healthy lifestyles: Therefore, Costs will skyrocket.
Patricia Cyr, Bangor ME
cyrheart(at)gmail(dot)com
"...the potential for catastrophic failure becomes very, very large."
BINGO! Monocultures are all that way. We should have learned it from Mankind's disastrous experiences with monoculture farming, some of which have occurred right here in America.
Freedom isn't just a human right; it's also a defense mechanism. When Smith sees that some practice of Jones's has brought about his demise, he can make use of the information in his own protection -- if he's free to do so. But political imposition of any kind of standard universalizes that standard's vulnerabilities as well. Anyone who's been educated in strategic and tactical planning learned that early on.
Americans' residual freedom is their last line of defense against many an ill. Numerous assaults are in progress upon our freedom to inform ourselves, to choose our own degrees of armament, to select our own employers, employees, lovers, friends, and neighbors, to set our own aesthetic and intellectual standards, and so forth. The indisputable end is the extinction of all freedom, of freedom as a political concept. If we allow ourselves to be seduced out of our freedom to select our own standards for medical care, we might then succumb medically to a single bacillus or virus as it sweeps over us all.
At least it would be a lesson to the raccoons, or the dolphins, or whatever species might follow us in hegemony.
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