In a free-market society it is critical that risk takers be allowed to profit from the risks they take. But they need to also absorb the costs of those risks. Other people should not bear the brunt of these risk either directly (via government bailouts) or indirectly. Indirect subsidy of risk can take many forms. Recently we saw investment bankers enriching themselves with short-term profits created by taking poorly calculated and irresponsible risk while our society paid the cost of those bad bets in the long term. Society has paid by suffering economic stagnation, unemployment and growing government debt caused by repeated use of massive government bailouts to prevent a banking collapse which would have caused massive wealth destruction.
The many causes of the financial crisis are well-known. We saw Wall Street banks selling CDOs on mortgage sub-prime while extorting the ratings agencies to provide AAA ratings on these worthless securities while at the same time taking short bets against these same instruments! The market created in these opaque CDOs allowed mortgage brokers to sell option-ARM loans to people (with 2nd loans to cover down-payments) and then to offload all the risk onto investors and/or Freddie-Mack and Fannie-Mae and ultimately the tax-payer. We saw companies like AIG selling credit-default swaps on these CDOs at levels they couldn't possibly afford to cover. All along, quarter-by-quarter, these clever financiers were raking in the money while the world's economies became more and more unstable. Then, when the house-of-cards collapsed, our government came in and bailed these so-called free market advocates out at the cost of trillions of tax payer dollars and our children's futures. I don't recall them saying, "no thanks, we took the risks we'll pay the price since this is a free market." Even as people were losing their homes and their jobs because of Wall Street, the Wall Street employees were still pulling in multi-million dollar bonuses (and they still are).
We must immediately enact substantive financial reform to prevent such financial shenanigans from ever threatening the world economy again. We should:
These and other financial reforms are badly needed to restore balance and stability to the world economy.