The Treasury secretary, Timothy Geithner, was up on Capitol Hill this morning testifying before the Senate Banking Committee. One of the terms he used in his prepared remarks was "systemic risk." Said the Treasury secretary: "In the fall of 2008, major policy intervention...reduced overt concerns about systemic risk." Later in his testimony, he says, "The rapid growth of the largest financial institutions and their increasing interconnections through securities markets have heightened systemic risk in the system. In response, we need to expand our capacity to contain systemic risk."
When you hear a government official talking about systemic risk, it's a signal to be skeptical about what comes next. One observation on the term comes from Eugene Fama, the McCormick professor of finance at the University of Chicago Booth School of Business. Professor Fama writes: "The term 'systemic risk' is less than 20 years old. It has become a scare term that governments use to justify bailout actions detrimental to taxpayers."
What do you think, commenters? Is "systemic risk" a useful concept or just a scare tactic?