One of the selling points of financial innovation was that it would distribute risk widely thereby insulating the the financial sector from large shocks. Everyone would take a small loss, but no loss would be large enough to cause any real difficulties. That turned out to be a false promise in the face of a large, systemic shock. As problems began developing in these markets, it became evident that risk was far more concentrated than the promoters of new financial products had claimed.
Tuesday, March 17, 2009
Tales from the Meltdown: AIG as Shadow Banking Reinsurance
Gillian Tett, Brad Setser and Mark Thoma note the following in a nested set of articles: “Concretations of risk, plagued with deadly correlations”