Tuesday, February 12, 2008

Short-term rates and banks' risk-taking (fg)

Recent financial turmoil gives rise to a number of questions. Perhaps you have already watched the interview with Peter Bernstein then you might recognized that the financial historian does not directly blame the financial models which are heavily used in portfolio management to be wrong. He rather notes that there are too many unkonwon unknowns in today's financial environment which cannot be traced down by any finanical model. I do aggree partly with this statement, though I am convinced that a broader look at things might have served as early indicators, especially for investment trusts etc.

Recent academic literature asks the question why is it that banks and investors took so much risk. There are many potential answers which might help to understand it.