John Kay of the Financial Times suggests the sub-prime meltdown is caused by markets, instead of distributing risk, actually concentrating it in the hands of those who can’t assess that risk.
That rule that might explain the current mood of US and Brit voters.
The financial economics I once taught treated risk as just another commodity. People bought and sold it in line with their varying preferences. The result, in the Panglossian world of efficient markets, was that risk was widely spread and held by those best able to bear it.
Real life led me to a different view. Risk markets are driven less by different tastes for risk than by differences in information and understanding. People who know a little of what they are doing pass risks to people who know less. Since ignorance is not evenly distributed, the result may be to concentrate risk rather than spread it.
Currently, majorities of Brits and Americans want to pull out of Iraq, presumably on the basis that the upside is to save the lives of our soldiers, and there’s no downside.
The problem is they’re ignorant of the downside, and so the risk has migrated from the politicians to them.
That ignorance may be because the average voter is too young to remember the aftermath of the US withdrawal from Vietnam, or the Arab world’s “oil shock” punishment of the West in 1973.
Like the banks who took on the sub-prime risk, our voters are set for an accelerated education in consequences.