The Paradox of a Predictable Failure in Risk Management

Abstract

The global economic crisis that appeared in 2008, outside the consideration for its tremendous effects on markets and people, has shed light on various issues. Most notably, the lack of transparency and honesty amongst actors of the finance sector played a critical role in the demise of well-known institutions such as Lehman Brothers and others that did not survive this financial quake. Despite what seems to be cyclical phenomena, the successive economic crises that have shaken the world over the last century have not served their true purpose: being a lesson for improvement of risk management tools as well as audit and control mechanisms. This paper highlights some of the reasons why recurring failures in risk management and transparency have led to the recent crisis and why it is very likely that the very same failures will eventually trigger another potential crisis of far greater extent. The appetite of the finance community and unscrupulous investors for fast returns is still prevailing today. And this is done with the discreet consent or the simple lack of responsibility and ownership of governments and regulating bodies. The risks of permanently and irreversibly damaging the financial and economic balance of the world today are far from being properly managed and controlled. This can only be the beginning of something worse, unless immediate remedial action is taken.