No doubt, the expansion in the variety of intermediaries and financial transactions has major benefits, including reducing the transaction costs of investing, expanding access to capital, allowing more diverse opinions to be expressed in the marketplace, and permitting better risk sharing. But it also has potential downsides, raising the question of whether we have unwittingly accepted a Faustian bargain, trading greater welfare most of the time for a small probability of a catastrophic meltdown. My view is that the world may be riskier because of skewed incentives among investment managers,
...more
