From my friend Michael Lewitt at HCM in his latest commentary "Reality Bites", he opens with a good quote. Michael is a big market bear. He makes some very good arguments on why things will not get better and trafficking in the distressed market means he has seen his share of bad news. The quote from Garrison is very timely and makes a key point. If there is no clarity on the risks, it cannot be priced and excesses will be taken.
"So long as risk is effectively concealed from borrowers and lenders or actually shifted to others, risk-taking will be excessive. The initial phase of excessive risk-taking will manifest itself as an economic boom, but eventually, when actual losses begin to change the perceptions of borrowers and lenders and begin to impinge upon unsuspecting others, the boom will give way to a bust....[A] market system whose credit markets involve risks that are partially concealed from the lender and partially shifted to others will be biased in the direction of excessive risk-taking. And excessive risks are converted in time into excessive losses."
Roger Garrison1
1 Roger W. Garrison, Time and Money The Macroeconomic of Capital Structure (New York: Routledge, 2001), pp 111, 120.
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