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Confidence and Delusion Part IV

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Risk continued

I hinted at the main issue with risk in our economy, but did not specifically say it or explain the true consequences. The truth is that every economic venture has a risk that someone must bear. The true consequence of this statement results when risk is not shared fairly. Basically, if the creators of a venture do not share in the risk, then someone else does. The bailout of Wall Street is a perfect example of the situation. Most of the major players in the risky business plans that resulted in the meltdown, including those that made great gains from the system and got out before the collapse, did not take responsibility (financially) for the results. Thus, the risk got dumped onto the tax payers like a ton of bricks. Of course, there are some that said we should have just let them fail. These are the people who do not understand the interconnectivity of our economy and the devastation letting those banks fail would have caused. They refuse to understand that the cost would still have come home to them because they donít remember the lessons of the great depression.

The sad part is that everyday citizens around the world are paying the costs of risks not borne by businesses and their leaders. For example, I caught part of a story about an automotive company that refused to bear the risk of reduced profits caused by the need to properly dispose of unused automobile paint. They decided to secretly bury the paint drums at little cost to themselves. By doing so, they passed the risk of the cleanup costs to the residents in the area. Now the residents have to pay the costs or live with the toxic paint that is oozing out of the rusted barrels into their yards. Of course, they may turn to the government to help with the costs, funny how we donít like the government until it comes time to pay for the risk costs not borne by others. Another example, from memory, was a period of time when Florida was getting smacked hard by hurricanes. A lot of people had insurance to cover the losses; however, the amount of claims overwhelmed some of the insurance companies. Because the companies ended up going bankrupt, the government ended up footing more of the bill for the risks that these insurance companies did not adequately plan for, like AIG and the banks.

The whole point of my posts on risk in our economy comes down to who is paying for it. Right now, the gap between the rich and the poor is being fueled by an inequality in risk assumption. Those that are making most of the gains are not carrying an equal amount of the risk, while those bearing most of the risk are not being fairly compensated.

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