In all the replays of what went wrong with the economy, the recurring theme is the failure of risk management–by the government, Wall Street and overreaching home buyers.
Over the weekend, we get disheartening replays of how the Bush Administration abdicated responsibility for regulation and how greedy hotshots at Citibank created a mess that taxpayers will now have to clean up with billions in a bailout.
“In normal times,” the Economist says in its piece on Treasury Secretary-to-be Timothy Geithner, “risk aversion damps economic cycles; in a crisis, it accentuates them, leading to withdrawn credit, evaporating liquidity, margin calls, falling asset prices, and more risk aversion. ‘The brake becomes the accelerator,’ as he puts it.”
So we have a topsy-turvy world now in which prudence that has morphed into fear is causing the freezing of credit, and the kind of gambling that caused the problem is the prescription for curing it: