Description: This article presents a hypothesis that the market cycles are primarily created by human actions, behavior and assumptions rather than by random variables. An analysis of main financial events over the last decade reveals that: a Every one of these events has had a human touch b The current financial crisis is an aftermath of the excessive economic boom during this period and c A new economy must emerge from human ingenuity and innovation.

Description: Modern economies are based on the premise that all the main players look after themselves. The bankruptcy and limited liability laws gave property speculators and banks a put option on society so they could walk away from losses above their capital base, yet enjoy all the gains of such speculation. They acted in what they believed were their own interests. It seems that society – well aware of what was happening – did not effectively look after its own interest and now must pay the price.

Description: Interest rates rose from 2004 through 2007, so adjustable mortgage rates increased and many borrowers fell behind. After home prices topped out in 2006, speculators and some buyers who had overstretched found it impossible to refinance. This caused mortgage insurance claims. Insurers may want to study others’ missteps.

Description: This crisis first started with subprime loans and quickly morphed into a credit crisis that eventually engulfed a lot of financial institutions around the world. If a AAA were really a AAA, this crisis would probably have been contained and localized. As the crisis developed, evidence emerged from the shadows that revealed the questionable quality of some AAA-rated MBS or ABS. Subprime loans were the weakest link. As the credit boom came to an end and the economy slowed down further, the Alt-A, prime and credit card loans were also affected. The subprime crisis is only the symptom of a much larger underlying problem. Both consumers and corporations were overleveraged.

Description: The present crisis in global financial markets has created an impression that enterprise risk management ERM has failed broadly to protect the safety and soundness of the financial system as well as that of many institutions, including insurance companies.

Description: Three drivers that are often not at the top of lists about the origins of the crisis: a At some level, every entity that handles risks should be assessing what would happen if they ended up owning the risk that they thought they would only have temporarily b The change in the real estate market that was driven by the non-marginal amount of new subprime buyers who came into the market and c Risk managers should always be aware that marginal analysis can produce incorrect results.

Description: The upside of the downturn is that these powerful, influential, connected and important, yet incompetent people can be removed from their positions. To quote a great insight of Ayn Rand: “There is no substitute for competence.”

Description: With the possible exception of full faith and credit debts of the United States, every loan carries some risk with it regardless of the borrower, and this risk varies depending on the creditworthiness of the person or institution that is supposed to repay the debt. Bearing that risk requires some sort of capital, both as a legal requirement and as evidence of good sense in lending, but recently we seem to have forgotten the basic relationship between a loan and the capital associated with it. The lesson of the current debacle is, or certainly ought to be, that the risk inherent in a financial transaction cannot be made to go away by the mere act of repackaging that transaction and renaming it.

Description: Crises are devastating. They leave behind a high amount of entropy unemployment, poverty, lack of safety. But this is half the truth. The other half says that crises are to some extend good, because they provide a natural crash test to discover current practices’ risks and limitations, and in response, give rise to more efficient regulation, to financial innovations and to the wakening of the vitalizing powers of society, as the old and corrupted die and new ideas emerge and give us the opportunity to reflect upon the future we want to have.

Description: In the current financial markets turmoil, it is tempting to ask whether things might have turned out differently. I think the pain in our financial markets would have been less if more actuaries had been involved. 10 reason are offered.