The Perverse Incentive

Economists often talk about the perverse incentive, like when wealth becomes so consolidated that banks tend to lend only to a small number of people (low liquidity), referred to as concentration risk.

Reversing the perversity is a function of diversity. Supposedly, lenders (people who have consolidated most of the money, who then extend credit to keep the economy from accelerating into a catastrophic risk proportion, known as systemic risk) avoid the so-called unsystematic credit risk (concentration risk) by diversifying the borrower pool.

The first thing to notice is that diversifying the credit risk does not reduce the risk. It makes it more diverse (changing the incentive), which is a natural hedge against probable default. Second, this is what Sanders says he will do in priority (which is not anti-business, but perversely pro-business); and third–he will actually do it, without intending to reinvent the problem in a TBTF (gamma-risk) dimension (perversely argued to be otherwise unavoidable).


About griffithlighton

musician-composer, artist, writer, philosopher and political economist (M.A.)
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