Uncertainty is more dangerous than risk; error is more dangerous than fraud

Article Highlights

  • Europe’s banks and monetary system are in crisis from sovereign debt of weak governments

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  • The central problem may be simple: the human, and thus the financial, future is unknowable

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  • We learn lessons after every crisis, but it doesn't stop the next one from happening

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Uncertainty is more dangerous than risk; error is more dangerous than fraud

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Europe's banks and entire monetary system are in crisis from the sovereign debt of financially weak governments.But the capital requirement for banks to hold such Euro denominated debt was zero.

It was defined as "risk free," but has instead led to massive losses. What an amazing set of blunders, it now seems, both by those who bought the debt and those who wrote the capital requirements-especially since there have been 250 defaults on sovereign debt since 1800! We are in process of adding to the list.

Similarly, many investors, including government sponsored enterprises, bought AAA rated mortgage backed securities made out of subprimeloans, to their sorrow. These securities were given especially low risk based capital requirements by international financial regulators. Why? And why were the rating agencies passing out these AAA ratings?

The private, government and government sponsored actors who made what are in hindsight so obviously blunders were intelligent and well educated, not stupid.

The majority of them, one must believe, were well intentioned. So why were the risks, which turned out to be disastrous in both cases, not appreciated until it was too late? 

Read the full article here.

Alex J. Pollock is a resident fellow at AEI

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