Risk society: challenges and responses

Risk

In a capitalistic society, risk is often associated with reward. In many instances, it takes risk to garner the large profits and wealth that many entrepreneurs amass over time. It is through this risk that society overall benefits. The vast ecosystem embedded within a capitalistic society requires innovations to better compete in a global environment. Technology, energy, and banking all require new and unique products to cater to a growing international dynamic. Inherently, these activities can be risky. New product launches, for instance, must cater to changing consumer sentiments. The forecast of these changes could have been in error resulting in a monetary loss as oppose to a profit for the company. By taking the risk however society improves by having new and innovative products available when they are demanded. It is therefore my contention that risk, when controlled, is good for society overall. There are however, negative aspects of excessive risk taking as it relates to society at large. One need not look any further than the recent economic catastrophe of 2008. In this instance, excessive risk ultimately jeopardized individual's institutions as well as society at large.

To begin, due primarily to the global nature of the worlds market economy, adverse risking taking in one area of the world, could have grave consequences for another area of the world. Likewise, a collapse in one area of the world could have dramatic consequences for other areas of the world, as evident by our current economic circumstances. Our current economic situation could be partially attributed to a juxtaposition of both fraud and integrity as it relates to risk taking. Without the aid of IFI's the damage may have been worse than what actually occurred. This is due primarily to securities know as mortgage backed securities (MBS) and collateralized debt obligations (CDO). Both of which heavily contributed to the current economic cycle.

In the early 2000's housing prices were rising at an incredible pace. Many Americans were becoming wealthy by simply "flipping" houses on the market. This activity of flipping houses has many inherent risks. Some of which include the inability to sell the home at the desired price or rapid decline in home prices resulting in an underwater mortgage. The prevailing sentiments at the time, believed that these risks were few and unlikely to occur. As such, many individual attempting to get rich quicker, elected to borrow money to purchase homes. This activity is known as leverage. The benefit of leverage is that it amplifies gains. The negative aspect of leverage is that it can also amplifies loses as well. The prevailing sentiments during this period indicated that housing prices could not fall, but instead would only rise. Society, at the time, did not properly acknowledge many of the risks within the housing market. As such, individuals continued to purchase homes and garner wealth. With this wealth, came an increase in prosperity and a standard of living for many Americans. However, this practice soon came to an end when the housing market bubble burst in late 2006. Much of the blame can be attributed to the excessive risk taking on the part of the investment banking and financial institutions. Investment banks were essentially giving loans to individuals who they knew could not afford the payment. This activity was risky, as the propensity for loss is enhanced due the individual's inability to pay back the loan. In addition, they were giving these loans on confusing terms that the average individual couldn't understand. Finally, they would package these securities and sell them to institutional investors as secure investments when in actuality, they were not. This activity was particularly risky as investors around the world were unable to ascertain the degree of risk embedded in the security. They, much like the rating agencies, believed the securities to be AAA rated. However, due to the overall entanglement of the housing market, investors were unable to ascertain the risk once they were found to be risky as oppose to safe. With government backing, subprime loans were given to individuals in staggering numbers. Eventually, these individuals could not afford to make the payment and defaulted. Subsequently the world economy suffered severely. These securities were sold around the world due to the interconnected nature of our financial institutions, as such, a problem in one developed nation led to a collapse in other nations as well. This is a prime example of risk in society that is unwarranted. This risk without government intervention could have resulted in the destruction of the developed nations.