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The Dangerous Illusion That Risk Can Be Offloaded Onto Others
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
This confidence in central banks raises a pernicious systemic risk.
Do you drive carelessly because your auto is equipped with airbags? Perhaps not. But would you drive more cautiously if you were perched on the front bumper? If even the slightest collision would crush the driver's legs to pulp, I think it is safe to say we would all drive with a higher awareness of risk and with greater caution.
The faith that airbags and dashboards protect us in all conditions and times is misplaced. If vehicles were truly safe, how is it that 32,700 people lose their lives in vehicle accidents every year in the U.S. and hundreds of thousands of others are injured?
The risk, we are assured, is statistically low: "only" 21 Fatalities per 100,000 Licensed Drivers (practically zero, eh, except that it adds up to 32,700 people killed each year).
What statistics do not adequately describe, of course, is that most of those accidents occured in high-risk settings in which the drivers' focus and/or ability was impaired, even as they reckoned risk was managed/limited by the equipment, their safe driving record, etc.
In other words, the somewhat inebriated gent who slips behind the wheel on a dark rainy night senses the heightened danger; but reassured by the fact he's never been in a fatal accident, by his car's airbags, by the low statistical odds of getting killed, etc., he roars off into the unlit darkness. The odds of an accident in these conditions are much higher than the average listed in statistical abstracts, yet they are glossed over by the apparent "low odds" of the drive ending badly.
This is the Paradox of Risk: the more risk is apparently lowered, the higher the risk we are willing to accept. If the drunk wheeled off into the darkness on a bicycle, he probably wouldn't get far; he'd more than likely lose his balance and end up scuffed and sore but very much alive in a ditch. The real risks of navigating a dark road while impaired by alcohol are very much exposed on a bicycle.
Ironically, the real danger arises when the driver is reassured by "safety" features and past experiences which appear to limit risk or even make it disappear. This is the situation we find ourselves in today in global financial markets: the central banks are assumed to be the air bags of the system, limiting any losses to a few scratches rather than a complete wipe-out.
This confidence in central banks raises a pernicious systemic risk: assuming the "100-year flood" can't happen every 6 years or so. I have from time to time highly recommended The Misbehavior of Markets and now is the perfect time to check this book out, for the author, fractal pioneer Benoit Mandelbrot, explains in simple mathematical ways how Modern Portfolio Theory, i.e. the management of risk, is based on a faulty conception of risk and statistical chance.
In a nutshell: while modern portfolio management is statistically based (all those "standard deviations" you always see referenced in quantitiative analyses), the markets behave fractally. Fractals are known as the geometry of chaos, for they describe how seemingly stable systems can quickly, and unpredictably, degrade into chaos.
But as Mandelbrot explains, "100-year floods" actually occur with startling regularity in all markets. Put another way: you cannot disappear all risk with fancy statistical models and credit default swaps, etc., that offload the risk onto others, i.e. counterparties.
In other words, all you're really doing is masking the risk--you're not eliminating it. And in hiding the real risk, you are lulling the market participants into a pernicious choice architecture in which their willingness to take riskier and riskier actions is rewarded and encouraged, while caution is punished.
This is how you get a total systemic collapse of the entire choice architecture. And by this I mean not just the financial system, but the backstop provided by central banks and counterparties.
In a system that is now correlated to central bank policies, the idea that some counterparty will cover your losses is illusory. The entire notion that risk can be offloaded onto others is magical thinking: that when the system implodes, the counterparties will magically escape the highly correlated collapse.
This is another Paradox of Risk: central bank intervention/financial repression provides the illusion thay systemic risk has been disappeared, and this pushes all asset classes into correlation. The idea that some assets will escape the implosion is also illusory; what appeared uncorrelated can suddenly correlate overnight, destroying the entire fantasy that risk can be offloaded onto others.
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When we cannot know the Known Knowns through the most transparent societies in the short history of the world,
a Hispanic cliche comes to mind:
"Claro como Barro"
Clear like mud.
Lew says to raise debt limit by 5 Nov or risk default. Gotta keep those yeilds low so the US can continue to support its debt lifestyle. Onward debted soldiers. (or the Fed buys and parks it)
when the time is right
i'll unload my risk
one coin at a time ...
this is getting verbose and boring. all of us here know we are all f**ked well and good.
Slow motion train wreck. It's awful, but you just can't turn away.
Sometimes life imitates art.
A while back I was advising a client who was trying to borrow 40 million to build a factory. Ironically, the client was a reformed bank CEO trying to start a legitimate business. He forwarded an email from his financial adviser (a Nigerian banker). The email basically said- if I would arrange a USD 40 million bank guarantee, he would secure the loan for the client... (and pocket over a million in fees).
I wasted a least half a day just laughing at the email, and wondering whether it was serious, and how this guy ever got hired at one of the larger commercial banks in Nigeria.
"If vehicles were truly safe, how is it that 32,700 people lose their lives in vehicle accidents every year in the U.S. and hundreds of thousands of others are injured?"
More people die in bed than in a car. Are beds unsafe?
They are when I'm in them.
A 3000 - 6000 lb. vehicle is a weapon in the hands of drunk, stoned, reckless or inattentive idiot drivers, eh?
Risk can only be off loaded on Americans with NO political influence ... the NFL, Netflix and on to those planning for retirements, and Senior living on their savings!
What they gonna do to the central planners? We dont have pitchforks any more - we just blog!
When you preach to the Choir.............
Go preach to the head hunters.
Jesuit up.
yup! "investing" today is a lot like playing no-limit hold'em at a table where you're not only the small stack but the big stack(s) have an unlimited line of credit w/the house should they push all-in & somehow lose a hand despite being allowed to see the deck before betting...
Sharing the underlying risk between investments or assets simply drags down the entire system. The underlying risks will eventually surface. By tying them together you simply make the entire system unstable and therefore in need of a bailout when things go bad. The bailout is required to save any good assets tied to the bad assets.
Hello???
Risk can be offloaded to others. The downside is you might have to find a new society to live in as the old one is trashed. Time for an exodus!
Entire article is flawed by the use of the word "risk". Risk makes it sound random- like some accident that just happens. This isn't that. This is planned, systemic theft with malice aforethought.
If it was not, how could people like George Carlin have been so right THIRTY FUCKING YEARS AGO? Because there was a plan then and it's still happening now. Some are just better at recognizing it than others.
So has it been wealth redistribution or risk redistribution?
Risk is our friend. It informs us when it is allowed to be seen, and our government wants to conceal it, in the hopes that by ignoring risk we can "progress" with few inhibitions. Of course risk is nothing that can be actually eliminated by concealment, only made stronger and more dangerous.
Hey let's both get drunk and we'll take the bicycle. You drive and I'll ride on the handlebars!!!! Wwwweeeee
Plenty of muppets, no? GS says so.
Most of the bubbles and the resultant crashes have taught us although risk cannot be extinguished, it can certainly be transferred to others without their knowledge or approval. The worst of the worst is ultimately transferred to taxpayers or unsophisticated investors. It's not that the wealthy oligarchs never lose money, but when they do you can guarantee somebody's gonna pay for it.
Given that I singlehandedly offloaded all the systemic risk that Central Banksters offloaded onto us by offloading it back onto Central Banksters, I would say that the illusion of risk is by no means an illusion given that Central Banksters throughout the entire World are now systemically fucked up the wazzooo, Mr. Hugh-Smith.
And God bless Professor Emeritus Benoit Mandelbrot and Financial Alchemy.
:)