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A world of pvt. gains & public losses!
Fri, 8 Apr Pre-Open

The US financial crisis and the Japanese nuclear crisis may seem too far apart. But they both teach a common lesson about risks and our understanding of them.

The stories started on a pretty hunky-dory note. Experts in both the finance and nuclear power industry had assured that the new technology had eliminated the risk of catastrophe. Financial wizards had gone around boasting that they had mastered risk with their complex and innovative financial products. Nuclear power lobbies kept touting themselves as the solution for future green energy.

Now behold what has conspired. All their risk estimates have fallen apart. In fact, they have little clue about the intricacies of the risks they had assumed. With such massive disasters, the so-called benefits of these "bright" ideas have died away. One cannot help but ask how they did not factor the risk of such catastrophes?

There are several reasons for the poor management of risks. One obvious reason is that there is little empirical basis for judging such rare, "black swan" events. Hence, it is difficult to make reliable risk estimates. But this is not even the tip of the iceberg.

A much deeper and larger threat is embedded in the kind of system that we are all living in. Any society that privatises gains and socializes losses is destined to be doomed. A set of wrong incentives across the economic system and an absolute dearth of deterrents were the main causes of the US financial crisis. The consequences are now being endured by the common people in the form of inflation and joblessness. The big banks have been bailed out and are riding high on public money. They know the government will always protect them. The nuclear industry too will continue to ride on hidden public subsidies. The costs of nuclear disasters and unmanaged disposal of nuclear waste will be borne by the society.

This is indeed a dangerous society of gamblers where few thrive at the cost of the larger populace.

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