Economist's View: "I was asked what went wrong that caused economists to miss the financial crisis. For me, a key part of it was the belief in the risk distribution model. Let me give a simple example of how risk distribution works:"
In short: distributing risk does not reduce overall risks, it just distributes the costs more evenly. This causes enough moral hazard which increases risks and if the total risk increases enough, then the entire system can collapse.
See the end of the post for more links about how the financial crisis happened and also see this letter to the Queen.
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