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View Diary: Why No One’s Occupying Factories (139 comments)

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  •  asdf (0+ / 0-)

    when the risk exposure changes, behavior changes.  When behavior changes, risk structure changes.  When risk structure changes, the old risk assessments are obsolete and can't update itself without reexamining its fundamental assumptions.  Which computers can't do.

     

    but it is unlikely that increase (0+ / 0-)
    in risk would outweigh the gains made by diversification

    are we talking micro or macro?

    In the car example, people don't drive more risky because their lives are at stake too. And it's a hassle to replace a stolen car, so people generally don't want their cars to be stolen despite having insurance.

    Please don't take the metaphor so literally.  Because banks are insured against loss, they take bigger risks.

    Which means two things:

    1) the total amount of risk ingested by the banks increased.  That risk doesn't go away, it's just passed on to someone else.

    2) because insurance is cheap, banks prefer risky investments to safer ones.  Thus, since 2000, there's been plenty of capital for ponzi schemes, subprime housing bubbles, and credit cards, but businesses and even well-qualified homebuyers have been cut off from capital.  Why build a factory that might make a 6% profit when housing prices are doubling?

    Things like this keep the system in check. In area where there are less of these demotivators, you'll see higher premiums that people have to pay to offset the change in incentives.

    No, premiums rise to offset the insurer's perceived change in risk exposure, based mostly on historical default data.  Failure to look at "changed incentives" is a good chunk of the reason why shitty deals were given AAA bond ratings.

    If insurance were enough to deter risky investments, then it would no longer be cheap insurance and it would no longer have the benefits you enumerate.

    Passengers: Feel free to rearrange the deck chairs, but please remember that the bridge is off limits.

    by happymisanthropy on Wed Nov 09, 2011 at 10:42:26 AM PST

    [ Parent ]

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