Anticipating Financial Risks: A reality check by AEI's Alex Pollock

[W]e are not able to avoid repeated disastrous mistakes like those that led to the U.S. housing meltdown and the European sovereign debt crisis . . .because financial markets are governed by a [repetitive] system of interconnected decisions, theories, strategies, predictions, actions, and expectations that lead to booms and busts. History shows that the complexity of these interactions makes it nearly impossible to predict accurately which way the markets will go.” -- Alex J. Pollock in the August 2012 AEI Financial Services Outlook

Among Pollock’s main points:

  • Because of constantly interacting theories, strategies, predictions, actions, and expectations, uncertainty is an unavoidable fact of life in financial markets.
  • Everyone—from Wall Street “rocket scientists” to regulators and U.S. Federal Reserve bankers—is enmeshed in this complex, repetitive system of uncertainty, making even our most knowledgeable plans prone to mistakes.
  • Just as the government promotion of Fannie Mae and Freddie Mac, a well-intentioned policy, resulted in their financial collapse, the current vast expansion of financial regulation will not save us from future crises.

 

AEI resident fellow Alex Pollock is a former president and CEO of the Federal Home Loan Bank of Chicago. He can be reached at 202.862.7190 or through his research assistant at [email protected] (202.419.5212). For additional media requests, or to reserve AEI’s in-house radio (ISDN) or TV studio, please contact [email protected] (202.862.5823).

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Alex J.
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