Monday, March 22, 2010

Rajan on risk shifting

Raghuram Rajan 2005,

"While the system now exploits the risk-bearing capability of the economy better by allocating risk more widely, it also takes on more risks than before. Moreover, the linkages between markets and between markets and institutions are now more pronounced. While this helps the system diversify across small shocks, it also exposes the system to large systemic shocks - large shifts in asset prices or changes in aggregate liquidity."

This is one of the best macroeconomic explanations on why the system did not work.

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