Risk Manager-In-Chief
One way to view the current economic crisis is as a pervasive failure to manage risk. In fact, bad risk management actually explains a lot of what's gone wrong in recent years. And that realization is one we'd be well advised to bring with us into the voting booth in a few weeks.
One of the main reasons the financial system is seizing up is that too many institutions borrowed beyond their capacity and used the money to make risky bets. Some of those bets took the form of subprime mortgages--loans to people who were credit risks, but would be able to service the debt as long as their new home continued to appreciate at double digit rates. Other bets were in the form of derivatives--many of which also ultimately depended on home prices endlessly defying gravity.
The bubble burst, home prices began to slide, mortgage defaults accelerated, and the extent of overleveraging--borrowing beyond your means--in the financial sector was exposed. The Treasury and the Fed are throwing everything they've got, including a bunch of stuff no one ever knew they had, at the problem, but little is really sticking yet.
What does any of this have to do with risk management? A lot.
When lenders make a loan, they face a risk of not getting paid back. If that risk is kind of high, they're likely to insist on a hefty down payment and set the interest rate on the loan higher than they would otherwise. Remember, that rate is the cost to the borrower of the loan, and if the market is working right, risky borrowers should face higher rates, both to discourage them from getting in over their heads, and to pay the lender a risk premium--a little protection money--for taking a chance.
If the risk is really high, a reasonably savvy lender won't make the loan at all.
But what if both lender and borrower fail to recognize the risks they're taking on? What if the banks think a debt, whether it's a mortgage or a complex derivative, is perfectly likely to be repaid with interest, right on time, when the reality is that it probably won't be. What if borrowers believe they'll be able to finance a loan when in reality, they won't even come close?
And what if a president and defense secretary think they'll be greeted as liberators in a country they've decided to occupy?
The failure to accurately assess risk has been truly epidemic in this country, and the costs have ranged from expensive (and I'm talking trillions here) to fatal.
The key questions are why did these failures occur and which presidential ticket would be best chosen in that regard (okay, question two is a terribly transparent set up, but please read on anyway).
The failure to assess risk in financial markets stems less from greed--that's always been there--than from a combination of "innovative" transactions and lax oversight. The Greenspan Fed not only watched the real estate bubble inflate, they blew into the balloon, touting the wonders of adjustable rate mortgages. Though the Fed is supposed to monitor the subprime market, they ignored internal warnings that large imbalances were forming. As Peter Goodman points out in this must-read article, Greenspan and other top officials blocked initiatives to regulate derivatives, despite the fact that the growing magnitude and interconnectedness of this market meant that their failure threatened the system.
Economists and bankers failed to manage the credit risk that occurs when cheap money and large external (i.e., from other countries) flows of capital finance a spending spree that's not supported by real income growth. In fact, the ability to package and sell that NINJA (no income, no job, no assets) loan you just made to some other dealer, meant that loan originators didn't need to worry about those pesky, old-school underwriting standards.
How did it come to this? The answer has a lot to do with economic ideology. Mainstream economists convinced policy makers that markets were self-disciplining. Oversight, borrowing constraints, the enforcement of lending standards...these would only cuff the invisible hand. Instead, the market would punish those who underpriced risk. Even when key markets were showing clear signs of flying off the hinges, the nation's top economists were reassuring us that these "temporary disequilibriums" were of little concern.
You see how well that has worked out. We very desperately need a new economics that sees market failures--and accurately prices risk--much sooner than the current brand.
But while bad risk management in financial markets is capturing our attention right now, the problem goes much deeper. Faulty intelligence overestimated the risk from WMD's in Iraq, and underestimated the challenges our military would face from the insurgents. In fact, when it comes to risk assessment, economic or otherwise, it is now quite impossible to trust the judgments of our leaders.
Which brings us to leadership. As noted, the economic failures to manage risk were caused by ideological blinders. The foreign policy failures were caused by the inability of our imperiousness leaders to entertain evidence that didn't fit their views. You can't assess risk if your mind is closed. Ideologues, who are by definition impervious to evidence, need not apply.
Now how does this all map onto Obama/Biden versus McCain/Palin?
Obama will be good at this. He has a balanced, evidenced-based approach to risk assessment. To the consternation of many in the base, he is not particularly ideological. He's also naturally cautious, deliberative, if not plodding. In fact, these very qualities were often (rightly) criticized during the campaign, as he failed to catch fire and communicate a simple, compelling narrative.
But at this point, many voters are looking for precisely the kind of leadership I believe he offers in this regard. It's not indecisive. It's gather the evidence, assess the risk factors, and make the call with the greatest objective, not subjective, chance of achieving the goal. It doesn't mean you check your gut at the door. It just means you let your brain into the room too.
With McCain, I fear that when it comes to making the big decisions, we'd get the subjective, shoot from the hip we've seen far too much of in recent weeks. That's certainly the message from the erratic turn the campaign has taken, as they lurch from one surprise to another. The old McCain was not particularly ideological, an advantage in judging risk; the new one is worse than Bush on this score.
McCain's economic policy is a good example. At this point, it's simply impossible to objectively look at the Bush economic record, and conclude it worked, yet McCain doubles down on it. He's also moved to right of Bush on the war, opposing timetables that Bush and even the Iraqi's themselves are brigning to the table.
But the worst sign regarding McCain as risk manager was the choice of Palin for his VP. That move, made for purely short-term political gain, with no regard for the risks it posed to the country, has turned even a number of staunch Republicans off their ticket. It's not just that she's inexperienced. It's that she doesn't seem to know what she doesn't know, and it's easy to imagine her, if she got the chance, making choices from inside the same sort of insulated Bush/Cheney bubbles that got us where we are today.
Finally, and I recognize I wade into choppy waters here, there's a relationship between a candidate's religious views and his or her ability to effectively assess risk. Of course, presidents have and will always be profoundly informed by the ethical tenets of their religion, and I see nothing wrong, and much right, with that (though how Bush's condoning of torture fits in here, I'm not sure).
But then there's these types of comments from Palin, who called the Iraqi war "a task from God," asserting that "there is a plan and that plan is God's plan" (sorry, but I think God's plan would have been infinitely better than the one in play). She made a similar point re God's will in getting their gas pipeline built up there.
With respect, that's mixing religion and policy analysis in a way that I fear leads to inadequate risk assessment. Bush never made such revealing statements, but it may be the case that evangelicals don't always make the best risk assessors.
I suggest we tout this role of risk manager-in-chief over the next few weeks. Given the challenges facing our country, it's a critically important distinction between the two tickets. And given the direction in which the polls are finally trending, it would appear that the majority of voters are ready to place a reality-based risk assessor in the oval office. To not do so would just be too...what's the word? Risky.
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There is increasing evidence that Paulson was influential with two U.S. SEC Chairmen, William H. Donaldson and Christopher Cox, in receiving restraint in the Commission's exercise of oversight requirements.
In 2004, at the request of the major Wall Street investment houses, including Goldman Sachs, then headed by Paulson, the Commission agreed unanimously to release the major investment houses from the
(2) net capital rule, the requirement that their brokerages hold reserve capital that limited their leverage and risk exposure. The complaint that was put forth by the investment banks was of increasingly onerous regulatory requirements -- in this case, not U.S. regulator oversight, but European Union regulation of the foreign operations of US investment groups. In the immediate lead-up to the decision, EU regulators also acceded to US pressure, and agreed not to scrutinize foreign firms' reserve holdings if the SEC agreed to do so instead. (1) The 1999 Gramm-Leach-Baliley Act, however, put the parent holding company of each of the big American brokerages beyond SEC oversight. In order for the agreement to go ahead, the investment banks lobbied for a decision that would (3) allow "voluntary" inspection of their parent and subsidiary holdings by the SEC.
During this repeal of the net capital rule, SEC Chairman Donaldson agreed to the establishment of a risk management office that would monitor signs of future problems. This office was eventually (4) dismantled by Chairman Cox, after discussions with Paulson.
"But while bad risk management in financial markets is capturing our attention right now, the problem goes much deeper. Faulty intelligence overestimated the risk from WMD's in Iraq, and underestimated the challenges our military would face from the insurgents. In fact, when it comes to risk assessment, economic or otherwise, it is now quite impossible to trust the judgments of our leaders.
Which brings us to leadership. As noted, the economic failures to manage risk were caused by ideological blinders. The foreign policy failures were caused by the inability of our imperiousness leaders to entertain evidence that didn't fit their views. You can't assess risk if your mind is closed. Ideologues, who are by definition impervious to evidence, need not apply."
The answer is Resource Based Economy. Scrap the whole Federal Reserve and money supply around the world. We don't need a debt based global economy, it just makes everyone's problems worse. Key word everyone not a select few.
Your premise is wrong why we went into Iraq...All this including the financial crisis is a well thought out plan by the Bush Administration to make us all toe the line to their regime.
This is very complicated stuff. How can Presidential candidates break it down in a sound byte?
Good point!
I noticed that a number of pundits criticized both candidates after the second debate for a lack of substantial answers on how to "fix" the economy.
I, too, would love to know how we are going to pull ourselves out of the mess that the Bush administration has put us into, but how in the name of God can anyone sort out these very complex problems in a 2 minute answer?
The debates are not the venue for trying to explain very difficult issues to the American people who, for the most part, only listen to the sound bytes anyway.
After the elections are over, President-elect Obama should assess the situation and give a lengthy news conference with much detail included.
22 days and counting! Obama '08
Here's how they break it down for us:
1) They identify the group of voters that are "on the fence".
2) They promise free goodies at someone else's expense to them.
3) They couch it in language that makes the recipients feel morally justified in their theft.
If you require a sound bite then you are too stupid to understand what is going on. This is complicated, it takes an understanding of history and most importantly and understanding of the policies that got us here. For the last 40 years we have been directed by a group that wants to end the New Deal - to return us to the glory days before Teddy Roosevelt, when a chicken in every pot was a real dream. We have seen labor laws destroyed - guess what, the middle class really does benefit from those laws. We have seen banking regulations returned to the yesterdays of pre-Great Depression. We have seen insurance regulations eliminated entirely - tried to get your insurance company to pay any claim recently - ask the folks in Louisiana and Mississippi, or check with anyone who has recently been diagnosed with cancer. We have seen our prisons fill up and drug use soar, we have spent a hundred billion dollars on a war on drugs and gotten 2 million prisoners to support. We have spent a trillion dollars on a war on terrorism, just so big oil can get better contracts with the Arabs. Gosh, I guess this is complicated, maybe we need to stop watching desperate housewives and start watching CSPAN.
I hope all you left wingers can live with your socialism, because if you put Obama in the white house that's what you'll get. There will be no stopping it! Get a clue Obama,Pelosie, Reed. A couple of years with this control and the wealthy will leave the nation and who then will be taxed for redistribution. Mean while the government will own your ass!
Let's say a country (or a world) is like a home with the parents as the government and the four kids (as well as the parents) as citizens. The home has an income and it has expenditure, and everybody would agree that each child deserves an equal opportunity to flourish. Would the parents want to go into debt answering to every whim and desire of one kid, including skipping school, thereby making that one kid fat, lazy and ignorant, while they lock the other kids in a room, feeding them only bread and water? In the end the parents lose their income and the debts are called in. It seems that we have a scenario where everyone loses.
I just listened to McCain speak and what impresses me most is his use of fear talk so much. That seems to be the republican way.
Let's be excited about a candidate who speaks of hope. I don't hear talk of fear or crises from the Obama camp.
Unlike the Dems endless drumbeat of hate for "the rich".
I don't want to hear a detailed plan on economic recovery before the election. Anyone who offers a concise, detailed plan right now shows judgment which is highly suspect to me. I have been watching the stock market for months... My investments are scary... You want a different scenario.. just wait a few hours or watch it all change over a few days. Today's contingency plans are not going to be the best plans next month.
What we need is a dynamic leader who will not try to force the problem to fit into a predefined box that defines what is happening right now.
It would be far wiser to promote in the campaigns, what methodology will be used after the election to define, evaluate options, then implement reasonable policies to point us away from the cliff that is just beyond the ditch we are plowing through now.
I am far more impressed with Obama keeping his options vague than McCain spouting half baked ideas that when you really look close at them.. are stupid.
This article is nonsensical. You have no idea if Obama is a better or worse risk assessor than anybody else. How about the "risk" of the government always stepping in to save people from themselves, causing larger and larger fiascos to develop. Part of the reason the govt. allowed (as if it's any of their business anyway) the lending laxity to continue, is because they were trying to "save" us from the DOT com recession. Now they're going to "save" us from ourselves by bailing out deadbeats (individual and institutional), inevitably leading to an even greater debacle in the future (which they will "save" us from again). What about the risk management of that?
Since the intelligence of Senator Obama is OBVIOUSLY light-years above that of J-Mc (and let's not even talk about Palin) it is ridiculous to think there is really any choice here at all...
Being intelligent doesn't make you a good risk assessor. BTW, I'm not saying McCain can do it either.
Slick talking and intelligence are not the same thing!
you do not understand what happened i can tell.
if it interferes with life liberty and pursuit of happiness, the govt should step in,
like in cases of consumer protections, and good business practices,
how about hat net capital rule, which once removed allowed banks to overleverage themselves in to oblivion, and now they need a bailout
Based upon intelligence, and the way he has steadily piled up points against MCCain, I'm very impressed with the way Obama has developed his strategy.
But more important, Obama is objective about the War and the Economy precisely for the reason that he is not culpable. But McCain is culpable, he was a cheer leader for getting into Iraq and he has been involved in financial regulatory matters for decades.
It's just like a CEO or a football coach. If you have had the major responsibility for structuring something, you're the last guy in the world to admit it has gone wrong. That's McCain's problem, same as Bush, he's going to keep trying to prove that he was right, not focus on an entirely new approach.
You need to take another look- see at what the writer was saying.
True, we have no Idea if Obama is better at assessing risk, however, the polls reflect the feeling that he may be.
Now, are you suggesting that you somehow know what the government is thinking? Are we to think that you know more than you do?.... More than you can know?
True, we have no Idea if Obama is better at assessing risk, however, the polls reflect the feeling that he may be.
If Bloomberg was running, I would think we had choices of two qualified people. But McCain is not qualified to be President. And Palin is a reflection of his capacity to make wise decisions.
I grew up in Pittsburgh where U.S. Steel did not have any catholics in top management in 1968. Obviously also no Italians,Jews, African Americans or women. The stock was selling for $100.00 per share in 1956. Fifty two years later it is selling for $60.00. They had a billion dollars of cash flow a year.
Today we face very great challenges and we need every talented person available regardless of race,creed, or religion to help. The fact that the Senate race in WVA is going to be a Democrat and Obama has no chance is sad
And the idea that a candidate can't get elected if he suggests that he might have to raise taxes is a shame. We Americans are wrong. Don't we care about our children?
Your assessment of Palin is much too kind.
The good news is that if she became President, she would likely be quickly impeached and removed from office. Her wing of the Republican Party is just too lacking in credibility, even among the McCain and Bush supporters in the congress.
No regulation needed because the economic situation is 'self-correcting'? Ya, sure, you betcha. Well, it's correcting itself now, see? Can we remember that Social Security was in enough trouble and thank the correct-thinking Congress who voted to NOT invest the funding in the market? There are people who need and deserve this money, who worked hard all their lives to pay into Social Security. It's bad enough that their checks are late or that their claims are denied, but to think that the system would have lost the money in the markets last week is ABOMINATION!! The BOGUS 'rescue' plan is so disgusting to those of us who really need tangible help, who need enough work to pay our bills while executives who should be thrown out into the street are cashing out their 'golden parachutes' (and for those of you not paying attention, the 'No Golden Parachutes' clause only applies to new executive contracts, not to those already in existence), well, we would be paying those bills if those executives hadn't sent all our jobs overseas. We need the help NOW. McCain-Palin want us to pay attention to History - did anyone watch the History Channel last night? They repeated the program "Last Days on Planet Earth." The Number One threat of global destruction is warming enough to raise the sea level 40 feet, which could happen before 2050, less than 50 years away! Voting for McCain-Palin is not just a mistake - it's suicidal!!!
only if there is NO GREED
Of course government officials are never greedy. LOL.
In the summary you state that faulty intelligence overestimated the risk from WMD's in Iraq.
THIS IS NOT TRUE!!!!!!
The National Intelligence Estimate published on October 1, 2002 -- a collection from 16 intelligence agencies -- stated there was no evidence that Iraq had begun re-amassing WMDs. CIA chief Tenet reaffirmed this to Bush on the morning of October 7, 2002. However, BUSH LIED to Congress and to the American people in the evening of October 7th about the NIE findings and hence we ended up with the Iraq war.
This weekend, McCain has repeated that lie in saying that we were in fact threatened by Iraq's WMDs. Is McCain just mindlessly repeating Bush's lie or does McCain not know of the 2002 NIE's findings???? Either way, McCain is revealing himself as unfit to be President and Commander in Chief.
I agree... McCain could have done a much better job if he did not have to baby sit Palin.
I would rather see a good race... so we can learn more about each candidate's positions.
Now, we have to see what Obama/Biden proposes..
This commentary is exactly right, I believe. It is painfully obvious these events happen in tandem - that the cavalier, irresponsibly delegatory and manipulative nature of the administration has been reflected in the business atmosphere as a collusive festival of high crimes against the nation and the wage-earner, with an apparent accompanying loss of moral steadfastness in the general population. The apparition of easy money has been too entrancing for almost everyone, it might seem. But those elected to uphold the well-being of the land are to be accountable first and foremost - that includes congress.
I suspect by now there should be an overwhelming number of reflective voters who grasp the logic presented above - that Mr. Obama seems to possess the pragmatic virtues necessary to offer a clearly better prospect of constructively addressing some of the underlying causes for this mess, that is not only economic but social and political. A daunting task, one might say - and bound to upset virtually everyone at some point if the process were to be effective long-term.
While betting vetted for 20 months, Sen Obama has proven to be honorable, intelligent, a man of integrity and caring towards to needs of average Americans. He's built and lead a superior campaign organization that is unmatched in the history of American politics.
Conversely, Sen McCain has put on display for the entire world, his erratic, angry, intolerant, shoot-from-the-hip behavior and shallow minded approach to problem solving. He appears to be willing to risk the livelihood and safety of the entire nation to satisfy his own blind ambition.
The Choice in 2008 Could Not Be More Clearer ...
Obama has not been vetted & that is the problem. Look at Obama's allies. The Democratic Media has not probed the meaning of Obama's radical allies, supporters and ideological partners. They reflect Obama's radical views which are being kept hidden and not analyzed by the Obama campaign and his PR machine, the mainstream media.
*Yawn* Senator Obama and his associations have been examined ad infinitum. IF you had genuinely chosen to seek the answers, you would have them by now.
YOU SHOULD HAVE VETTED SARAH PALIN.
BEHusseinM777
just because you were not paying attention to the dem primaries does nto mean he was not vetted.
get real, read a book, or visit the candidates web sites
McCain is blaming the economy for the reason why he's behind in the polls. Maybe he should take a look at his poorly run mismanaged disfunctional campaign.
McCain is hoping a coalition of veterans and illegal aliens can put him over the top.
I totally agree with this op/ed and yes McCain is a shoot from the hip kind of guy. Just look at how his campaign is going to know this know. It's in the dumper!!! Look at our country, it's in the dumper!!! President Bush is no great thinker and it shows. No thanks, I will be voting for Sen Obama!!!
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