Financial Crisis – New Industry Model – Crisis was predictable

Risk Management 2.0: Overcoming the Current Financial Crisis and Restoring Stability and Prosperity with a New Perspective on Risk by Bob Tapscott and Don Tapscott, Oct 2008.

The “risk bubble” has broken. Restoring long-term confidence in the financial services industry of the US and other industrialized nations will require more than government intervention, fresh capital, and updated regulations.

Building on the digitization of everything financial, participating organizations (issuers, investors, and intermediaries) need to become Next Generation Enterprises. This requires a new industry model built on the four principles of Wikinomics: transparency, peering, sharing intellectual property, and acting globally. Call it Risk Management 2.0.

The current credit crunch was predictable.

In 2005, Yale economist Robert J. Shiller published the now famous index tracking housing prices back to 1800 (Figure 1). Over a 200 (!) year period, housing values in the U.S. only went 20% above the inflation- adjusted 1800 price level three times, and each was the peak of a bubble that quickly collapsed.

From 1997 to 2005, U.S. housing prices rose from 10% above the inflation-adjusted level to 100% higher. How any economist, regulator, or central banker could look at the chart below and not surmise that something was amiss is astounding.

HIGHLY recommend looking at Figure 1: Historical Home Values …  from 1890  on page 4 of the report.