The Risks of Financial Diversification (OECD Observer)

Nat O'Connor: Amy Domini, CEO of the social investment firm Domini, provides a concise and clearly written argument against modern 'diversification' of financial products, in the OECD Observer.

She argues that "diversification, this theoretical means of reducing specific risk, ... exacerbated systemwide risk."

What "institutional investors found, thanks to the 'creativity' of Wall Street, was the chance to make bets on assets they didn’t want." ... "The human costs of this game-playing are devastating. Citizens of several countries experienced double-digit surges in their citizen’s primary food staple. ... In Nigeria, sorghum rose 50% during a nine-month period in 2009. This translates directly into starvation."

The law governing pension funds directs funds into diversification as a 'prudent' step to avoid major losses. Domini argues that "taken together, these standards mandate the very behaviour that so crushed the lives of millions of people."

"Modern portfolio management gave birth to a healthy idea: diversification. But that healthy idea has been subverted. This is not a problem that markets can correct on their own: the strong arm of government must be utilised before the second wave occurs. Diversification into assets that produce no goods or services to humankind undermines capitalism."

How much of the activity and jobs in Dublin's International Financial Services Centre (IFSC) are based on financial assets of this kind, that do not benefit humankind? I don't know. But it is worth considering whether we are encouraging unsustainable and undesirable forms of investment. Legislation to regulate what types of financial products are permitted might be just as important as development aid and famine relief.

Posted in: Economics • Banking and finance • Fiscal policy

Tagged with: financial sector • IFSC • oecd

Dr Nat O'Connor     @natpolicy

Nat O’Connor is a member of the Institute for Research in Social Sciences (IRiSS) and a Lecturer of Public Policy and Public Management in the School of Criminology, Politics and Social Policy at Ulster University.

Previously Director of TASC, Nat also led the research team in Dublin’s Homeless Agency.

Nat holds a PhD in Political Science from Trinity College Dublin (2008) and an MA in Political Science and Social Policy form the University of Dundee (1998). Nat’s primary research interest is in how research-informed public policy can achieve social justice and human wellbeing. Nat’s work has focused on economic inequality, housing and homelessness, democratic accountability and public policy analysis. His PhD focused on public access to information as part of democratic policy making.