Risk Creep

Anyone involved in contracting knows about "scope creep" -- that nasty habit of jobs getting bigger and bigger (oh, why not add another sink? I thought YOU were going to coordinate the meeting) as time goes on.

The same phenomenon is at work in this economic bust.

Let's go back to post-WWII when the modern S&L was born. Savings and Loans were created to finance the building of the suburbs by making mortgage loans and paying interest on savings accounts from those earnings. Sounds like a low-risk business. BUT a few changes introduced a gradual risk-creep that just kept going.....

Obviously the S&L concept works well with stable interest rates, so the banks can manage a nice profit from the spread between what they take in on loans and what they pay out on savings accounts.

But in the globally interconnected economy, with interest rates fluctuating, such a model is in trouble. S&Ls got locked in to low income from low rate mortgages while needing to pay out higher savings rates. This led them to search for higher returns from their investment -- inviting both fraud and financial innovation.

In two words, Risk Creep.