Risk Management on Wall Street and in the Gulf

Our capitalist system is built upon risk. Investors risk their money in new enterprises. Entrepreneurs risk their time and careers. Some ventures succeed and others fail, and the market determines which is which.

Sometimes, however, there are other risks. The Congress is currently considering financial reform and the Volcker Rule is at the center of the debate. This Rule would prevent banks from using their own money to invest in risky hedge funds and other similar investments. The reason for the Rule is that people who deposit their money in a bank should not see their risks multiplied exponentially because a few bank executives want to get rich quick. A hedge fund may provide a windfall, but the Volcker Rule is a regulatory hedge against greed leading to the kinds of risky decisions that will redound badly not just upon the bank executives taking the risk, but upon the average customer of the bank. There is a danger that the Rule will be suspended for further study, but Washington is not a university, and “study” is a euphemism for killing the Rule. Congress should resist the lobbyists for the banks and pass the Rule.

Another example of the need for government to manage risk continues to unfold, or leak, or spill, in the Gulf of Mexico. The investors in British Petroleum risked their money to get at the profitable oil reserves underneath the Gulf. But, they should not have the right to risk the ecosystem of the entire southeastern United States. The government is the only actor with the power and the authority to step in and require companies engaged in off-shore oil drilling to adopt the strictest of safety measures and, should such measures prove inadequate, to ban further drilling.

Life entails risk. There is no avoiding it. But, some risks are not worth taking and it is up to the people, speaking through their government, to decide which risks are worthwhile and which are not, and to manage the risks that are taken. This is not anti-capitalist. It is the only way to save capitalism from its propensity to excess. Further, it is the only way to ensure that the economy serves man and not the other way round. That is a fundamental, dare we say a “non-negotiable,” principle of Catholic Social Teaching.