The Financial System of the Future…

Found this link on Greg Mankiw’s blog.  I decided I would post it as well.  This is a really interesting idea and may not be all that farfetched.  It would solve a lot of informational problems, especially moral hazard.  It basically allows people to adopt all the risk and not banks and other corporations.  Therefore there are less likely to be risky dealings as people don’t want to risk losing their money.

Our current crisis was caused by banks taking big risks because they could.  If banks fail then shareholders can only lose as much as they invested.  With a cap on how much they could lose on big risks and seemingly endless gains, banks went to town with subprime mortgages and risky lending.  This system promotes risk taking and creates these huge bubbles that inevitably burst, which then causes deep recessions like the current one we are in now.

Enjoy the article.  It is very interesting.