Why taking risks may save us from the next financial crisis
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Nobody wants bad things to happen, whether it’s natural disasters or financial ones, but what happens when crisis prevention takes risk right out of the equation? The Wall Street Journal’s Chief Economics Commentator Greg Ip has spent some time pondering that. His new book is called Foolproof: Why Safety can be Dangerous and How Danger Makes Us Safe.
On making ourselves safe:
Oftentimes, when we’re trying to make our economy, our environment, ourselves safer, we’re actually doing things that may make us complacent or take more, different risks and end up having different types of disasters. That was the story of the financial crisis. We dealt with the risks we knew like inflation and recessions and bank failures and in the process, we encouraged people to think that we had made recessions and financial crises a thing of the past and encouraged them to take more risk. Just think about driving on a snowy road with snow tires. You have more traction so you drive a little bit faster, which works great until you spin out and your accident is worse.
On the financial crisis:
There absolutely is going to be another crisis. One of the points I want to emphasize is that crises result from taking risks and risk taking is something that is not bad. It’s actually good. It’s why people take chances on new innovations, new businesses. We can’t have a system that gets rid of all possibility of crisis. Banks are going to fail. What you want is a system that allows banks to fail without bringing down the rest of the system, and we’ve got that now with the Dodd Frank law.
On banks taking risks:
It’s not a lot of fun worrying all the time that you’re going to lose your money because of financial crisis. If we insisted that banks never took any risks at all, they wouldn’t lend to the businesses who in the end will make those innovations and create those jobs and in the end make us all wealthier, so I guess it’s necessary to have a balance here to accept the small disasters and make sure we don’t allow the big disasters to occur.
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