Quote from Martinghoul:
Because capitalism isn't perfect...
Of course capitalism isn't perfect, nothing is. That's why in a pure laissez-faire capitalist system, you have a self-regulating process. If someone makes the mistake of investing in a bad industry, they lose their money and go out of business. If a bank takes too many risks, the depositors take their money and the bank goes bankrupt. If a hedge fund is overleveraged, guess what, they go out of business when things go bad.
Also, people typically don't take bad risks, because there is no one to save them from going bankrupt when they make bad decisions. There were a litany of reasons why this latest financial market crash came about, but one of the major reasons was overleverage and not taking into account appropriate risk levels. Why do you think this was? In a capitalist system, would this have happened? No. The reason it came about was because they weren't really taking abnormal risks from THEIR perspective.
Every time there has been trouble the government came to the rescue. Whether it was long term capital management and the Asian crisis in 1998, the latin American debt crisis, etc. The FED and government came to the rescue. So if you're a participant, you must add this new variable into your risk measuring algorithm.
Assume that the risks they took (on average) were obscene in the 2000's. They would have been obscene, if they didn't have the extra variable of the FED/Gov coming to the rescue. With that backstop, it reduces your risk and allows you to take more risky bets. If the financial sector believed that no one would be their to bail them out, would they have taken the same risks? Of course not, you don't get that far by taking bad risks. And the few that did, would have gone out of business.
So taking into consideration the gov/fed backstop, the risks they took from their perspective were not out of line. If they made profits, they would get to keep them, if they didn't and were about to go out of business, the government would save them. It's one of the reasons why they took such huge bets.