Wall Street's latest Waterloo has been nothing if not educational. Apparently, the government, the financial community, and the business world more broadly are shockingly bad at estimating risk (as an insurance company, AIG was supposed to be in the business of measuring and accounting for risk).
The shock has left many wondering what's coming next. What other economy-threatening risks are we missing?
This financial meltdown reminds me of another, larger catastrophe in the works: the change in the earth's climate and what it will do to business and society.
Although those two challenges may seem worlds apart, there are three critical attributes of the financial crisis that are eerily similar to those of the climate crisis.
First, the buildup of financial risk was relatively slow-moving and diffuse. After a number of years, as banks divvied up the mortgages and became overexposed to one class of investment, nobody even knew what was on their books anymore. Similarly, the buildup of greenhouse gases in the atmosphere has taken 150 years and represents the most diffuse problem humanity has ever faced. Every aspect of society from businesses to homes to cars owns a sliver of the problem.
Second, bankers seemed to think that the party would continue forever. What else can explain such an impressive level of denial about how prepared homeowners were to pay back loans or how fast home values would need to continually rise to support the entire scheme?
For years, environmental challenges also appeared to be far off. Resources appeared infinite, like easy credit, and many people still seem to think so ("Drill, Baby, Drill!").
But readily available resources are dwindling. When that immovable truth meets the unstoppable force of rising demand from India and China, prices will rise... and fast.
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