Foolproof summary

Just as helmets made football and hockey more dangerous, the introduction of safety measures to stabilize our economies inadvertently helped cause the financial crisis that began in the late 2000s. But how exactly?

In an attempt to deal with economic instability decades earlier, the US Federal Reserve averted a recession and, in doing so, laid the foundations for the 2007–2008 financial crisis.

As we’ve seen, the preventive measures we put in place can bring about unforeseen trouble, even disaster. And this doesn’t just apply to the world of finance.

In an attempt to avoid natural disasters, we often end up exacerbating the damage caused by future disasters. Take forest fires. The advent of forest management undoubtedly helped save lives and extinguish fires. However, it’s also one reason why forest fires are more extreme than they used to be.

Just as it’s better to let smaller fires burn out on their own to avoid flammable forest debris building up, experts assert that it may do more good in the long term to accept that systemic risk is a part of life.

Moreover, there are actually benefits to doing nothing at all to prevent crises.

Was Shakespeare right when he had Ophelia say to Hamlet, “the best safety lies in fear”? Could living in fear be the answer to protecting ourselves?

Most people fear activities like nuclear power generation and air travel, because they feel inherently dangerous: when things go wrong, disaster ensues and lives are lost.

We’ve seen how trying to foolproof our existence can make us engage in dangerous behavior, and that we sometimes feel secure when we’re really at risk. But no one wants to feel constantly in danger, so it makes sense to opt for a balance between risk and security.

If an activity is inherently very risky, sometimes not engaging in it at all is better than trying to make it safe. This is illustrated by the zero-tolerance attitude to volcanic ash in air travel, but also in the world of finance as exhibited by the measures Toronto Dominion Bank (TD) took in 2005 to effectively eliminate risks from their business practices. As was standard practice at the time, TD was more concerned with buying up stocks, bonds and derivatives rather than traditional lending. But as it dawned on their CEO that the success of this practice relied on its inherent riskiness, he decided to cease trading in derivatives. In retrospect, this was smart thinking, as the bank, along with the Canadian banking sector, was only slightly harmed by the 2007–2008 financial collapse.