Biggest Risk to World Economy? Blind Capital

Back in 1856 one of this newspaper’s editors, Walter Bagehot, blamed crashes on what he called “blind capital”—periods when credulous cash, ignoring risk, flooded into unwise investments. Given not only the inevitability of such moments of panic but also finance’s systemic role in the economy, a government had to devise some special rules to make finance safer. Bagehot invented one: the need for central banks to rescue banks during crises. But Bagehot’s rule had a sting in the tail: the bail-out charges should be punitive. That toughness rested on the view that governments should as far as they could treat financiers like any other industry, forcing bankers and investors to take as much of the risk as possible themselves. The more the state protected the system, the more likely it was that people in it would take risks with impunity.


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The future of finance

The more people that invest without doing enough research on what they actually are investing in, the more likely the whole world economy will collapse in stages over the years.

For example, because of Lehman and AIG it caused a ripple effect. The U.S. because of relatively efficient legislated recovery systems in place after the Great Depression was the first out of the hole. However, if you look around the world economies like the EU, Russia and China are having an even harder time than the U.S. did and still are because their economic systems are less efficient on some levels and more cumbersome in the long run. So, it could be another 5 to 10 years before they pull out of the economic hole caused by the last batch of Blind Capital investing worldwide.

What about the next one that happens without enough laws in place to protect enough of the world's economies?

When nations were more economically separate like they were in the 1930s and 1940s problems were more isolated into countries.

On a purely economic level the world is now one place so what used to be countries are more like cities on the world stage of a one world nation. Though this is purely economic it is still the way things are in a de facto way now worldwide.