The financial meltdown was caused, in part, by people whose job it was to evaluate risk being able to "spread" that risk around and thereby limit their exposure to that risk. Once the risk got spread far enough, it essentially became everyone's risk whether you wanted it or not.
I think this practice is inherently unsafe, for pretty much exactly the reasons why it lead to the financial crisis this time. Yet, banks are still doing it (example from Sept 6, '09). I outlined in detail why I think spreading risk is dangerous and incompatible with our financial system in this post. I now am more convinced that this should not be allowed on a large scale.
Our financial system works only when those who take risks also have to shoulder the burden of those risks. Our financial system works only when we minimize the amount of the defaulting loans that the federal government has to absorb.
Any kind of financial instrument that allows people to "spread the risk", inherently have the incentive for people to take more and more risk because they can realize the upside now, and pass the downside on to others. When this reaches a big enough scale, which it inevitably will, only the government (that is, we the people), will be big enough to absorb the risk, and we will be forced to because of the interdependence of the different parts of our economy.
We need to insist to our representatives that we force regulations on the financial industry to prevent all this downside to be passed on to the country as a whole. We need "risk containment".
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