I'm an avid sports fan and religious ESPN the Magazine reader. In the most recent (Sept. 19) issue, an anonymous NASCAR driver makes a bold and controversial claim: the current cars have become TOO safe. It sounds crazy, but "Driver X" makes an excellent point that can teach us a valuable lesson about the world in which we live.
In 2001, one of the most recognizable sports figures in America, Dale Earnhardt, lost his life on the track in Daytona, Florida. In the decade that has followed, safety in NASCAR has progressed exponentially. In the opinion of Driver X, it may have gone too far. How is it possible that increasing the safety of these race cars could have negative effects?
There's a group of guys out here who don't worry about cause and effect because there is no real effect.
By increasing the safety of the cars, the risk of injury to the driver is decreased, thus drivers have less incentive to avoid reckless behavior on the track.
I watch guys and I can almost hear their brains saying "F-- it, nothing bad's going to happen. And if it does, we'll all be fine"
Hopefully, it has become clear where I am heading with all of this. The current financial system has become "too safe", at least for the major players. Big banks and investment firms have had the rules shifted in their favor to the point where risk is no longer an important factor in decision making. Investment risk can be reduced by proper research, responsibility, and knowledge of the markets; but when laws allow the remaining risk to be brought to minimal amounts, investors have no incentive to act responsibly.
The bailouts of Wall Street and the banking sector provided the final elimination of investment risk. We have shown these greedy and careless people that there are no consequences for their actions. They have caused severe hardship for many people and helped divide our country, yet they have suffered very little, if any at all. And the worst part is, there does not appear to be enough desire to change the status quo.
The anonymous driver also points out that the younger generation of NASCAR drivers and fans are growing up with no knowledge of the way things used to be. They have no concept of the dangers faced by drivers because they have never had to live with the consequences. In the same way, the up-and-coming bankers and investors have been trained in this minimal-risk environment and they have seen the effects of bailouts and preferential government treatment. Without risk there is no fear of failure, and reckless, irresponsible behavior is rewarded. The thing about overly risky behavior without the fear of consequences is that eventually the crash will occur, and it will be the worst one yet.
But there has to be a little fear too. Just a touch will do. The "Oh crap, that's too far" tingle. Without that fear, you can't push the edges because there's nothing in you to tell you where those edges are.
Driver X certainly doesn't advocate stripping all of the safety out of NASCAR; there is no reason for a sport to be any more dangerous than necessary. In the same way, we should not discourage innovation and advancement in investment strategy, but the financial world must contain risk in order to promote growth. Failure must be an option, even for the largest and most powerful investors.