The article questions the disappearance of prudence among financial players, observing a widespread retreat from risk across various sectors. Bank and non-bank investors have significantly reduced their lending to businesses; for instance, business lending by UK pension funds, which was a third of their assets a generation ago, is now less than 2%. UK banks have shown no net lending to UK companies since 2008. This risk aversion has stifled dynamism, despite non-traditional investors like venture capital and private equity attempting to fill the void, though even these groups saw fundraising fall by over 20% last year, and financing for UK companies by 30%.
This trend extends to regulatory bodies and governments. Regulations such as Basel III for banks and Solvency II for insurance companies, originally designed to mitigate excessive risk, are now seen as contributing to insufficient risk-taking. Governments, too, after running large deficits to cushion economic shocks, leading to G7 public debt exceeding 100% of GDP, are now retreating from fiscal stimulus, turning fiscal policy into a drag on growth in the US, UK, and euro-area, potentially creating macroeconomic uncertainty akin to the 1930s.
The author argues that this collective caution, or "safety-ism," is making the world less safe by impeding necessary change and risk-taking. Joseph Schumpeter's concept of "creative destruction" is in retreat. The article suggests that government, being uniquely positioned to bear long-term risk, should act as a "patient venture capitalist," investing where private markets fear to tread. This would help heal the private sector's "psychological scars" and encourage greater dynamism. However, current debt-first fiscal rules hinder such government action, prompting a call for rules that prioritize growth and maximize national net worth over minimizing gross debt.
