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December 20, 2014

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THE ECONOMY:

Farewell to risk, for now

Risk taking helped turn Vegas into a booming city, but the downturn has made consumers less willing to take a plunge — for better or worse.

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Risk and risk-takers have been celebrated, fetishized, apotheosized in the American economy and culture for two decades. George Gilder, bard of ’80s-era supply side economics, summed it up: “A successful economy depends on the proliferation of the rich, on creating a large class of risk-taking men who are willing to shun the easy channels of a comfortable life in order to create new enterprise, win huge profits, and invest them again.”

Gordon Gekko of Oliver Stone’s “Wall Street” was a fictional hero to a generation. Our real heroes include Everest climbers and strivers such as Bill Gates, who left Harvard and the promise of an easy corporate career to start a software company.

All of this benefited Las Vegas.

“Our whole history is about risk,” said Michael Green, a College of Southern Nevada historian.

The risk it takes to play poker and craps.

The risk of leaving family and social networks elsewhere for a fresh start in Las Vegas.

The risk of building a casino or raising the money to do so. Michael Milken, for example, sold risk in the form of junk bonds so the Steve Wynns of the world could build massive architectural playgrounds on the faith that people would come here by the millions to spend.

It all paid off. Our population soared.

And now it’s come to an end, at least for the time being.

As the recession deepens, economists and psychologists say Americans are cleaving to security. Risk has taken a holiday, and nowhere is it being felt more broadly than in Las Vegas. From Iowans who aren’t dropping as much money into slots, to Nevadans who aren’t buying homes, to casino companies that can’t find financing, Las Vegas is suffering at every level.

The data tell part of the story.

Clark County had 10,000 fewer residents in this July than it had a year before, a stark reversal after decades of explosive growth.

Strip gaming revenue was down 5 percent for the year that ended Sept. 30, and nearly 10 percent for the three months ended Sept. 30.

Nevada has led the nation in foreclosure rate for nearly two years.

Although it’s hard to believe now, many older Americans grew up fearing risk. They carried the hard-earned lessons of the 1920s boom and Depression into the post-war years.

Robert Wright, a financial historian at New York University’s Leonard N. Stern School of Business, confirmed in an e-mail that the Greatest Generation preferred the safer investments of saving accounts, war bonds and life insurance — if not their mattresses — to the stock market.

Since 1980, the stock market has soared, while other risky investment vehicles, such as high-yield bonds, private equity funds and hedge funds have also come to dominate the financial economy, mostly because investors sought out higher returns in exchange for more risk.

As for gambling, as David Schwartz of UNLV’s Center for Gaming Research noted, in 1950 the attorney general of the United States stood up at a conference and announced that the official policy of the United States government was to oppose the spread of gambling.

In retrospect, that seems quaint.

Since 1997, total gaming revenue nationwide grew from $51 billion to $94 billion. During the same period, Nevada’s population rose from about 1.8 million to about 2.7 million.

What happened in the interim, between the America of war bonds and the America of junk bonds, between the America of the Kefauver hearings and the America of casinos everywhere?

Our attitude toward risk fundamentally changed.

First, risk was something to seek, to find, to master.

Second, while risk was celebrated, its downside was significantly downplayed.

The resulting cultural message might seem contradictory but it was actually a perfect fusion for those who had a lot to benefit from the shift: Risk is cool, and risk is risk-free.

This could be seen in the Las Vegas Convention and Visitors Authority advertising campaign for Las Vegas. “What happens here stays here” says: Come engage in risky behavior in Las Vegas, and don’t worry, it’s risk-free because your wife or girlfriend or mother won’t hear about it because no one will tell.

Risk is cool, and risk is risk-free.

Soon, the attitude carried over to Nevada’s development and homebuilding sphere, as no amount of money for a tract home in the desert or a plot of land on the Strip seemed too much. So, in May 2007 the New Frontier and its 36 acres sold for $1.2 billion. The hotel was destroyed that November, and the land sits vacant.

Amateurs got in on the action, too. As Schwartz noted, “Everyone was their own speculator, their own wheeler dealer,” flipping houses and building strip malls.

Then reality set in. Nevadan and American attitudes are changing, perhaps fundamentally.

The panic in the financial markets this year has been the first indicator, as investors abandoned the stock and credit markets with what’s called a “flight to quality” — a clamoring for government bonds, which are seen as carrying the least risk.

“I would think most people will rein themselves in with regard to risk-taking, and that will make quite a bit of difference in places like Las Vegas,” said Salvatore Maddi, a professor of psychology at the University of California, Irvine, who studies risk-taking in human behavior.

Green said the risk-averse trend could be “very dangerous, if you also consider the people who have taken risks on the community as a whole and may no longer want to — the condo developer, the gaming company.”

Will they suddenly be risk-averse when it comes to Las Vegas?

Schwartz said he expects some “double or nothing” behavior, with some people in dire economic straits engaging in even riskier actions to make back their losses.

He said he’s concerned that the many government bailouts will give people the idea they can engage in risky behavior without consequence. Economists call this the moral hazard of government intervention.

For the most part though, Maddi said, he expects “the majority of people will be more careful.”

Maddi also said people will be more inclined to stay put elsewhere, rather than move to Nevada, so they can be closer to family and friends, which is a classic way to deal with stress.

Bill Eadington, director of the Institute for the Study of Gambling at UNR, disagreed with the premise that a friendlier attitude toward risk has driven Las Vegas growth. He has a more purely economic — as opposed to cultural — explanation for what’s happened: People have more disposable income and have placed gambling on their menu of entertainment options along with a weekend at the beach.

The growth of Las Vegas’ population has a simple origin, he said: good-paying jobs, and lots of them.

Even if this growth returns, however, it seems likely attitudes will be significantly altered after the current bloodletting.

With the pendulum swinging back toward solidity and security, more conservative attitudes are probably not a bad thing.

Robert Kolb, a professor of finance at Loyola University in Chicago who is organizing an annual conference on risk management, said that investors who were ignorant about risk before are clued-in now.

“In retrospect, it becomes clear: People completely misapprehended the risk,” Kolb said. “The wide assumption was that house prices would always go up. Las Vegas was Exhibit A.”

Kolb warned, however, that fear of risk could have negative consequences. The cost of taking no risk is great, he said.

“There’s a tremendous cost to being overly cautious,” he said, citing banks that will lend only to people with the best credit, even if other consumers or entrepreneurs are worth taking a chance on.

Schwartz agreed: “If people never took risks, you wouldn’t be anywhere,” he said. Indeed, investors took a chance on Apple and Google, and we’re all better off for it.

There’s an equilibrium that must be sought, he said: “There’s risk-taking, and there’s risky risk-taking.”

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