Financial Risk, Safe Bike Lanes

Here's an interesting mix. Real Time Economics summarizes Fed Governor Kroszner's words encouraging the financial sector to take risk into account. At the same time, Streetsblog summarizes some research that indicates that increasing the availability of safe bike lanes increases the number of people who bike.

Perhaps it isn't so much that bankers don't take into account risk per se, but as a result of the structure of incentives we've built up. Perhaps, to make an analogy, there aren't very many safe bike routes.

We have either highly padded and regulated cars (the commercial banking sector). Many accidents occur not because of lack of regulation but perhaps because of an "excess" it, which encourages drivers to stop paying attention to risk (I have a huge amount of metal surrounding me, I can't feel the wind, I have a nice, cushy seat and a seat belt and air bags, etc.). Lots of car accidents aren't really terrible, but a few are.

The idea of increasing the awareness of risk in bank management by adding indicators and reports is like adding an extra gauge in one's car that indicates the level of risk at which one is driving. I bet most people might pay attention to it the first day or two, and then just go back to the old ways ... because the incentives haven't changed at all. I know driving 20 miles above the speed limit is pretty stupid. But I haven't died yet, and I'm in a hurry.

On the other hand, bikers (and motorbikers) are exposed to huge amounts of risk if they interact with cars. Those who ride end up being highly risk-taking (who'd ride a bike in his right mind?).

What we want is a more innovative financial system that is, at the same time, not a danger to our health. We also want the environmental, health, and aesthetic benefits of biking (and, sure, the added flexibility), without the risk. Indeed, biking is in itself safer (who has ever heard of anyone dying from a bike collision).

Making safe bike lanes available increases the likelihood that people will bike rather than drive because now it's no longer just the highly risk-taking who drive. A "safe bike lane" is one in which the car-bike interaction is minimal. My analogy would point to creating areas of the financial system that in themselves are completely unregulated but which have no interaction with the rest of the financial system and in which collisions aren't very damaging.

The analogous group might be financial institutions that offer checking accounts, savings accounts, and perhaps CDs, but no more on the liability side (nothing fancy, nothing with very much leverage at all, nor very much return -- very solid stuff for people who have very simple needs and little sophistication), and very simple, very plain-vanilla assets that everyone understands easily and that are directly connected to some tangible backing.

These institutions would have to have access to liquidity in case of localized widespread defaults or liquidity needs (perhaps through the discount window and a network of similar financial institutions across the country), perhaps also full FDIC backing, etc., but would not be allowed to interact with the more sophisticated sectors of the financial system.

Perhaps what all this is leading to is a return of Glass-Steagall.