You have heard it many times before. Credit derivatives and other modern financial instruments are great because they allow risk to be shared more widely. Almost any central banker who discusses the subject feels the urge to preface their remarks with a qualifier that risk-sharing is a good thing in principle. That is even the case when they complain about the “opacity of the credit derivative markets”, as Jean-Claude Trichet, president of the European Central Bank, did last week.

Spreading risk more widely sounds like motherhood and apple pie, but in fact it is not clear whether shared risk means less risk. If, for example, banks have incentives to maximise profits by selling as many junk mortgages as possible to borrowers who cannot conceivably repay the loans, then something has gone wrong in our risk-sharing world. (My favourite are the so-called Ninja loans – no income, no job, no assets). We are clearly not better off if we all participate in these stupid risks.