Economy: We Forgot About Risk…Again!

I recently attended a conference where a speaker offered his theory for the cause and severity of the current financial meltdown. He said, “The ‘fuel’ for the downturn was a huge savings glut that required investment and the “oxygen” was a systemic ignorance of risk.” This is not a new story, but the size, scope and number of businesses and asset classes impacted has been far greater than previous ones. Margins and returns were razor thin and 30-1 leverage was utilized by some for purchase of assets. Investment decisions were based on the notion that values had almost no prospect to fall and capital would flow freely for expected investment periods.

Will lessons be learned or will memories become short after the recovery, now forecast by many economists for the first half of 2010? Will more federal regulation and oversight be required to “assist” in minimizing future bubbles?

There will be a need for some additional action by regulatory authorities. As far as the financial markets generally, additional capital requirements and transparency for such financial instruments as credit default swaps should be considered. In the CMBS world, the selection of rating agencies for specific transactions by a government related entity, i.e. the SEC, may be necessary to help revive bond buyers’ confidence.

Do the readers think this additional government oversight is needed? What are your suggestions?