Risk management is all about
identifying the risks when you have the scope to manage them well.
There could be several types of risks that you’ll have to face and
‘debt’ is one of those risks that continue to remain
unrecognized. The number of people that have feared debt is lower
than the number of those who have embraced it. No matter if they are
subprime mortgages or some other forms of debt, this has happened
because of the fact that debt has never exposed itself as a risky
candidate until the past few years.
People’s habit of embracing debt
instead of fearing it has boosted the debt in the American as well as
in the world economy. Difficulties in repaying debt caused most of
the Asian emerging economies to go through severe financial crisis.
There were debt relief options that worked for some, but the fact
that most couldn’t make a good use of them is what made things even
more serious in the next few years.
Debt and risk
There is a very strong relation between
debt and risk. This has every bit of truth in it, both at the
national and individual levels. The chances of disaster are very less
if proper risk management is being employed. It is important to
remember that risk can be categorized in two dimensions – less
flexibility and leverage. Less flexibility is because of the fact
that diversion of a portion of the income is important. The rise in
the chances of failure and the potential returns is because of the
leverage.
Making the predictions
It is important that such things be
foreseen beforehand. Well, there were some that did manage to foresee
the financial crisis approaching their way. Sadly, things didn’t
work out as planned as most of the people didn’t act or respond the
way they should. There are speculations that there wouldn’t have
been much of a difference even if things worked the desired way. A
very high rise in the levels of debt in the US was recorded in the
past decade. Such high levels of debt were seen only during wars.
It can be concluded that there is no
such thing as ‘low risk’ or ‘safe’ level of debt in the
economy. There was stability in the debt levels that were measured
against GDP three decades ago. All of these were termed as something
unknown that was more related to the economic law. The period of
Great Moderation managed to convince several people as they tried to
take on debt. They saw it as something that was more of a kind of
risk management and desirable in many ways. Great Moderation marks
the period when consistent growth was recorded in the economy. It all
began in the mid-1980s and continued till the year 2007 surviving the
blow of a couple of moderate recessions.
The better you’re able to handle
risks and practice risk management, the lesser the debt on you and
the related troubles that are sure to haunt your future life.