The great push-down of risk

I just watched this wonderful speech by one of my favorite people, Elizabeth Warren. This is from January 2008, before the crash and her becoming the top TARP Cop, and presents her research on the instability of the middle class. In addition to wanting to pass on this great video, it also reminds me of one of the aspects of our current situation that relates to, but is broader than, the current crisis that I have heard almost no one talk about, though here Warren does it beautifully. And that is how risk has been distributed in our society.

The generic theory about risk is that it is best, most cheaply held by the biggest possible entity. Companies deal with risk better than people, and governments deal with risk better than companies. This has to do with both their size and their longevity. And in general (and I say this in a hand-wavey and un-researched way) one mark of a society progressing in wealth and general civilization is that there are big institutions with sufficiently legitimate and stable governance that risk does get passed up the chain, allowing individuals to worry less and get on with their lives, accumulating wealth as they go. Except, it seems that in recent years (and again this is similarly gut-driven) in the US, that tide has changed direction. There is an increase in employment risk (Warren shows this in her lecture) which also translates into a health care risk. We have shifted more retirement risk onto individuals. I suppose you could say that increases in mobility coupled with increases in divorce and other non-traditional family structures has caused an increase risk in social networks.

I think that this, ironically, might drive people to take bigger gambles with their homes. If you think you are going to be screwed one way or another, it makes sense to throw a Hail Mary pass to try to lock in some wealth through real estate.

Anyway, I highly recommend this lecture.