here's a seriously thought provoking analogy

(snip)"Somewhere, 5 years ago, in a pig field in Mexico, there’s a risk guy who said “we run the risk of generating a nasty strain of influenza. If that happens our value-at-risk is losing the whole farm.” Management goes “Given how much we are making, that is acceptable.” The risk guy follows “but if it spreads, and even 1,000 people across the country get infected, the costs are…” And Management says “Stop. Not our problem.”

Somewhere, 5 years ago, on Wall Street, there’s a risk guy who said “if we have a nation-wide housing downturn, we are probably going to lose most of the book.” Management goes “given what we are making, that is acceptable.” The risk guy follows “but the costs to our shareholders, our counterparties, the taxpayers if we are judged too big to fail…” And Management says “Stop. Not our problem.”

A general economic model of “money goes uphill, (pig) shit goes downhill” would be great to see, especially in the context of increasing/decreasing costs, scales, and externalities. This is where government has to step in, not in order to handle quirky behavioral cues but to make sure the costs get assigned correctly. One can get very large indeed if someone else is holding the bag for you… (snip)

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