• the brokers wanted their commissions on new loans, and had no further liability;
  
• the institutions providing the loans did not keep them in their books, and did not care about the underlying risk;
  
• the investment banks bundling them into new securities did not hold the risk themselves, and provided extremely detailed risk analysis in their prospectuses, thereby informing potential buyers of all potential risks;
  
• investors did not read the prospectuses and bought the securities on the strength of their credit ratings - ratings that historically had a good track record of predicting risk;
  
• rating agencies provided the favorable ratings because historical default rates (the main driver of what ratings are about) were very favorable - and chose to ignore, like others, that this was a result of temporary bubble conditions rather than a permanent state of fact.

That's not risk risk. That's just plain old fashioned greed masquerading as "financial progress."

In the long run, we're all dead. John Maynard Keynes

Ris K (guaranteed to make money!)

minirisk (investing in renewable energies, esp. multinationals--I hear that Starvid is on the board and pushing for a nuclear portfolio to be added post haste.)

My magic risk (investments in dubious-science; returns are usually of the emotional kind)

Norisk Toomi (a misnomer for bonds tied to major extraction industries; and related rubbish collection and diposal businesses)

The first approach is to keep up with the literature on the state-of-the-art methodologies for analyzing securities

I remember that companies were supposed to make 15-20% profit a year--that equalled a good investment.  Is this rate moving?  The closer it gets to 6%---hmmmm....I was thinking that Chris's ideas (someone was talking to me about islamic banking which is taking off in England, where the interest rate is zero; just families passing property around, no profits taken)

Don't fight forces, use them R. Buckminster Fuller.

European Tribune: Risk, Uncertainty, and the Real Economy by NBBooks on February 20th, 2008

In October 2007, when these crises were just getting started, Marshall Auerback discussed Risk vs Uncertainty: The Cause of the Current Financial Crisis:

Here, uncertainty must be distinguished from the concept of "risk", even though the two are often used interchangeably. The distinction between the two was first drawn by the economist Frank H. Knight in his seminal work, Risk, Uncertainty and Profit (Hart , Schaffner & Marx; Houghton Mifflin Company, 1921). In an essential passage, Knight noted: "Risk is present when future events occur with measurable probability" while "Uncertainty," he elaborated, "is present when the likelihood of future events is indefinite or incalculable".

I think this is a deep feature of complex evolved systems: they can adopt and resist mounting pressures in a scale-free manner, up to rather abrupt failure at some point.

What Bernanke said last week is rather a vindication of doomsayers (emphasis mine):

Our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of critical markets. With financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence. The company's failure could also have cast doubt on the financial positions of some of Bear Stearns' thousands of counterparties and perhaps of companies with similar businesses. Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain. Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability. To prevent a disorderly failure of Bear Stearns and the unpredictable but likely severe consequences of such a failure for market functioning and the broader economy, the Federal Reserve, in close consultation with the Treasury Department, agreed to provide funding to Bear Stearns through JPMorgan Chase.

Here you have it: the financial system, the markets and the global economy were on the verge of disorderly collapse, baring a massive bailout. Highly necessary perhaps, but highly hypocritical for sure.

I found this graph in NRO agenda article. I could not trace the graph on The Big Picture blog.