[OPE] Trichet on risk

Jean-Claude Trichet , "Macroeconomic policy is essential to stability" (FT November 12 2008): "The root cause of the crisis was a widespread undervaluation of risk. This included an underpricing of the unit of risk and an underassessment of the quantity of risk that financial operators took upon themselves."

So what is the conclusion of this? If banks had charged more money and bigger insurance premiums for risky loans, the crisis would have been avoided, because there would have been more money in the kitty? I seriously wonder what a "unit of risk" is. Is that when your wife throws a bit of crockery at you because she's angry, and you don't know if you can step out of the way? How many "risk units" would be equal to one "util"?

Jurriaan

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Received on Thu Nov 13 14:44:45 2008