The 2008‐2009 Financial Crisis: Risk Model Transparency and Incentives

This great paper provides an accessible perspective to understand how government activity shaped incentives and lead to perverse, though predictable, behavior.

The authors analyze the impact ofwith the observation:

The “heads‐I‐win, tails‐the‐Government‐or‐investor‐loses” moral hazard incentives

that have increasingly shaped the behavior of market participants.

They conclude with a call for a return to confidence in the only system that has demonstrated an ability to convey meaningful information that can incentivize productive behavior and wealth creation:

For the dwindling few who haven’t lost faith in the markets (or at least haven’t found a better alternative), a possible alternative to outside audits of risk systems would be shift to more reliance on market pricing of financial entity risk.