Financial markets are supposed to be forward looking, a glimpse into the future of corporate profits and economic health. They generally do a good job of that, but the lasting lessons they teach are old-school wisdom.

The markets’ latest insight has been the old saw that there is no such thing as a free lunch. That is what many investors seemed to think they had on their hands, thanks to the marvels of modern financial engineering. Investors were snapping up highly rated (read: virtually risk-free) debt that promised them a much healthier return than boring old government debt.

The strategy worked for a while, until it didn’t. In the U.S., it emerged that those subprime borrowers were risky after all.

Canada’s credit crunch has been decidedly different — the underlying assets themselves seem sound, but the fear gripping the market has sent buyers heading for the exits.

Sage market veterans saw this kind of storm building for some time. They just didn’t know when it was going to hit.

Back in January 2005, TD Bank CEO Ed Clark was worrying about just this sort of disruption. He warned that while the banks had done a tremendous job of getting risk off their balance sheets, the result of all of this risk-transfer activity was that these risks were accumulating somewhere in the financial system undetected and untested.

While he was confident that the bank was handling its exposure properly, he couldn’t help but wonder about the rest of the financial world and its reaction to turmoil.

“When corrections occur, how does that risk rebound?” he wondered. “Does it end up rebounding on us in some way we haven’t thought about?”

Yes, it does. In this case, the banks seem to be taking the blame for not blindly stepping up to provide financing for asset-backed commercial paper conduits that were facing a liquidity crunch. They were being prudent with their own balance sheets, but nonetheless took a thumping in the market. Sometimes smarts are no salvation.

As markets re-acquaint investors with the concept of risk, what is the next lesson they have in store? Better safe than sorry. Money doesn’t grow on trees. You can’t judge a book, or an asset-backed security, by its cover. It seems many investors have yet to absorb even these old chestnuts.