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Friday, December 26, 2008

Risk Aversion: The Biggest Risk of All

Forbes has an excellent piece that lays out what will be one of the biggest challenges to face our economy going forward. For much of the last fifteen years, our economy was built on risk taking, and in many ways, far too aggressive risk taking. The blow up of the economy has made everyone from the banker, the business owner, to the consumer risk averse. In fact, it's likely that that our entire economy has become far too risk averse.

Without risk, our economy doesn't grow. Nearly a hundred years ago, my friend's grandfather was offered a business proposal. With a $5,000 investment, he could in on the ground floor of a company with a then revolutionary idea: the car radio. My friend's grandfather declined and that's too bad because the company is Motorola. While now hindsight is certainly 20/20, at the time this investment was a risk. It is exactly this sort of risk taking that creates economic growth.

Now, there is very little room for risk taking. Banks are cutting back on those they lend to. Businesses are cutting back on their investment. Consumers are cutting back on their purchases. Even the ultimately risk takers, the hedge fund managers, are hoarding cash and cutting back on their risk taking. Without risk takers, the next Motorola never happens.

Risk, much like anything, is a numbers game. The more of it we have the more of it turns out good. In this economy though, does anyone really see a business taking a chance on expansion? Does anyone really see an entrepeneurs investing in start up? Does anyone really see any wealthy person invest in anything but Treasury bonds? Even consumers won't take many risks on purchasing products, services, or anything else.

Our economy has become far too leveraged. As such, it is a good thing in the long run that people become savers, and the same is true for companies. Of course, if all everyone ever does is save, then no one will take a chance on risk. Without risk taking, the next Motorola is not created, and all the economic expansion that goes with it. We have turned into a nation of savers, or as Forbes calls us, wussies. This may eventually be a good thing, but in the meantime, it will stunt our economic recovery.

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