Business Risk: Risk Hedging, De-regulation and Segmentation
From the archive (2009): the crisis and healthcare read through one mechanism — who carries risk. Risk allocation is institutional design.
What do the US health-care imbroglio, global financial crisis, etc. etc. have in common: management of financial risk — hedge against it, segment it, try to change the rules, or let someone else pick it up.
Rules may not be enough.? We may have to go further into the basics of the impact of the? superstructure of investment finance on the transaction costs in the real economy, and the ability of elected governments to regulate within the election cycle.? So far, U.K. seems to be on the right lines in terms of thought, but action is still far away.
In other words, utility banking must be separated from ‘casino’ banking, and the latter publicized as such, with lots of small casinos networked together to provide the requisite leverage that the participants need.? And then, fiscal policy and economic regulation to be separated from politics. Again, easier said than done.
Goal: Investment must carry unhedgable risk, and the ultimate price of bad risk should be the liquidation of the firm without any adverse affects on anyone but the risk-takers.