A question that has been asked, but not nearly often enough, is why did the complex risk defrayal methods fail so completely during the global financial crisis? The GFC proved that risk measures based on INTERNAL measures, i.e. measures within the system, will fail. At the time of the GFC many participants thought they had defrayed their risk only to find out that they had not.
What is needed is a measure of risk that is EXTERNAL to the system. This is a logical necessity. The financial system works of the assumption that risk can be shifted from individual exposures. But risk cannot be eliminated, it can only be moved, something that was obvious to many outside observers but not to financial practitioners. What happens is that the risk is moved on to the system, which exposes all participants in ways they cannot anticipate. That defeats risk management.....Naked Capitalism
Risk is Always With Us
By Sell on News, a global macro analyst.
Cross posted from MacroBusiness
I think we know that the ultimate risk is that NFA flows recede as exhibited by a deficit that gets smaller and then moron policymakers DO NOTHING. (In fact they think this is 'a good thing'.
ReplyDeleteThis reaches a point where folks who signed up for debt are no longer recipients of NFA flows adequate to service the previous contracted debt service... and the system shuts down.
So the "risk" is ultimately 'morons in charge doing nothing'.
AND, this risk is NOT "external" to the system... and is not addressed by any risk models out there...
rsp
The dictionary definitions of risk & uncertainty are distinctly different.
ReplyDeleteLosing track of that explains the difference between bounded & unbounded losses, & between expectations & surprises.
Another lesson in the importance of basic semantics?
ReplyDeleteWithout clearly defined terms, the output of supposed reason is rank uncertainty, not just risk.