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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Risk Management includes threat assessment of our so-called enemies. There was no attempt by Bush and the Neocons to offer any type of threat assessment. We heard words like "grave and gathering danger" and "mushroom clouds" but no real assessment.
Even a rudimentary scale from 1 to 10 would have been useful in making recent invasion decisions. Placing the threat of Iraq, Iran, Pakistan and Afghanistan on that scale along with Nazi Germany and the Soviet Union would have told the real story. If you think about it, the threat from Iraq is a 1 compared to a 9 from the Soviets. Apparently, billions of barrels of oil trumps threat assessment.
The Democratic Media hide the Obama's radical left extremism to help elect him. What radical leftist ideology do these Obama allies, supporters & pals represent? Rev. Wright, Bill Ayers, Bernardine Dohrn, Rev. Pfleger, Lou Farrakhan, Khalid Al-Mansour, Rashid Khalili (the previous three are all notorious anti semites). Meanwhile Hamas, Hezbollah, Achmadinijad all favor Obama. Frank Marshall Davis- communist mentor of Obama), ACORN (COMMUNITY ORGANIZERS, GUILTY OF VOTE FRAUD) whom Obama worked for, tutored and supported financially. The Obama campaign even hired ACORN paying them $830,000 to register voters. Is it fair to question Obama's connection to the voter fraud perpetrated by ACORN? Not to mention Obama's business associates like Rezko, Allison S. Davis andy many others who specialize in making a pretty good living ripping off the taxpayer.
Blah, Blah, Blah, Blah, Blah, Blah, Blah, Blah, Blah, Blah, Blah, Blah!!!
Got any other tired, already been refuted talking points? Ayers is a respected educator in Chicago, Obama has already repudiated Wright, (what about McSame and Hagee?) Rezco didn't help Obama with his house(the people who sold it to the Obama's said that their offer was the best they got)
How does some foreign entity supporting you make YOU a bad candidate? That is like Margaret Thatcher liking the Washington Redskins, who cares.
Spew on troll!!!!
The lies we know for sure is that Saddam was linked to Ben Laden (LIE). Saddam has WMD's (LIE)
The whole world and so far half of the american people who are better informed favor Obama because they don't want World War III. A nut like McCain would be eager to start it. That's why even though world leaders don't want to seem favoring a candidate, the risks are too high that Sarkozy (the french President) made his preference for Obama clear in their joint press conference in Paris in August. So yes I think it's the whole world who favor Obama. It's a safe bet. And if I were i'd be a bit nervous to put somebody in the white house whose nobody in the world want to work with. Everybody is holding their breath waiting for Bush to go, but not see another Bush take over
stevespelling
The Democratic Media hide the Obama's radical left extremism to help elect him.
Look up all of McCain's shady associations: Russian Oligarchs, Neo-Nazis, con men, Charles Keating, international thieves and a host of others. Ever hear about the Bohemian Grove?
The Democratic Media could not even get within 100 feet from Sarah Palin to ask her one question (she answers questions at the rate of one question/week since she got in the ticket 5 weeks ago). The Democrat Media is silent about being denied access to a VP candidate a heart beat away from the Presidency. Damn the Democratic Media
The only truth seeker is the right wing media who forced Palin to give 2 extremely tough interviews to Hannity (she was crying at the end of the interview)
steve, false accusations will get you no where,
all i will say is Keating 5 cause yes Mccain did use his public office to try to influence
regulators to leave his friend, buddy, whom he traveled with on vacations, to leave him alone or go easy on him.
that is fact, not some loosely tied shoe strings
dang you guys are real good at stringing together your accusations by name dropping.
reminds me of my ex-wife who always came to an agruement with a list written out.
I had to start keeping a mental list of my own.
America We Need a Divorce from teh Republican party, they sound just like my Ex Wife
Good analysis. Clear, sharp,concise and therefore beyond McCain/Palin's comprehension.
Mistaking religion for policy is okay if you are willing to suspend free will and responsibility - no matter what happens - God mandated it... or God will fix it....
Their bibles obviously purged the proverb "GOD HELPS THOSE WHO HELP THEMSELVES"
one book banning too many.
I believe this is one of the most informative articles I have read in the latest days since the beginning of this financial crisis. Obama is the better choice. He is smart, a thinker, is not reactionary, articulate in putting forth his views and he stays on the issues no matter the distractions from his opponent. He is a true leader. He is refreshing. He is what America needs at this time in history. If you can think outside the box and consider all of America and its diversity, please vote OBAMA/BIDEN 08.
Obama reminds me of JFK. I was watching GPS on CNN Sunday and the host was talking a JFK an the Cubam mislie crisis about how he was smart, young, creative, intelligent and he was comparing Obama to JFK.
He's young and bright, so the comparisons are inevitable. Just remember that JFK was unpopular until he died.
We average Americans cannot know or understand the intricacies of world power struggles or world financial markets - but we have responded to the tone of the candidates. McCain gave in to fear while Obama remained Optimistic. We see the results in the polls. ..........
http://the
I agree. As much as I try and understand the complexities, the more I realize how much I don't know. Through his books and position statements, Obama is the first politician I have trusted enough to inform me and make me smarter so I can better understand the new global world we are now a part of. In short, I trust his judgment. Having lived through Nixon and now Bush, I never thought I would say that.
What makes you think he knows anything?
About MCCAIN’S ANGER, we need to know more—and the media has a responsibility to let us know before it is too late. This especially urgent in light of McCain’s recent behavior—in debates and stumping. WE HAVE ALL HEARD A LITTLE SOMETHING ABOUT his TEMPER--and now the code word is that he is erratic, which no doubt he is. The media has a responsibility to explore this matter more fully before it is too late--before November 4 elections! For a starter, there is a You-tube video circulating on the internet and now carried by Huffington Post. Time is of essence. I recommend it to everyone as a starting point. More than thirty public officials and some journalists testify to that, including Keith Olbermann of MSNBC. And about Cindy McCain, she is doing something that no Candidate's wife has ever done--attacking her husband's opponent. She is taking a dangerous path that will make her a fair game. I see hate and venom vanished all over Cindy McCain's face--and she lied. If she had the brain, and cared to look up the fact, she would have discovered that McCain also voted against a bill to fund the troops-- because it had a dateline for withdrawal, just as Obama voted for one because it didn't have such a timeline. That makes it two chills up her spine!
Have you seen this?
www.rollin
I've run my cartridge out making copies for conservative friends who don't have a computer.
I hear pundits and ordinary people alike saying Obama is too cool. One pundit even described him as what would be our first Vulcan president. But is why not being emotional a bad thing? McCain is a hothead. Do we really want someone like that in charge? This is a guy who I wouldn't trust to drive me to work. He'd probably come down with road rage and get us in an accident. Obama, I bet, would be very calming. That's what the country and the markets need now, someone who can keep us from panicking.
OMG! We nominated Spock and Kirk! ROFL. And, hey, I for one am definitely ready for a Vulcan president after eight years of Ferengi.
I don't buy it.
Obama's approach to Iraq is like someone who got a loan to buy a car, then before the last payment was due, he turned the car back over to the dealership.
We've already spent XXX billion on the war. We've already accrued another 1+ trillion in veterans benefits. We've already paid the vast majority of the cost.
And now he's spewing out rhetoric about $10 billion per month being too costly, and that it's bankrupting us. That's ludicrous. Yes, it's expensive. But making knee jerk deployment decisions now based on COST after we've already committed roughly 2 trillion to making that country a peaceful middle east ally is mind numbingly f00lish.
Of course, the flip side of this is that despite his rhetoric, Obama has no plans to yank out troops, like he promised a year ago. Instead, he plans to leave 80,000 troops behind, and continue paying for their deployment. Surely this will cost a very large amount, in the billions of dollars per month. So he's plainly deceiving the voters with he complaints about cost. He plans to spend tens of billions more there, as does Bush, as does McCain. Obama has lurched so far right that now he accepts the "conditions on the ground" litmus test, which is 100% contrary to his position last year, and even earlier this year. And of course, any troops or money saved would go to escalation in "unwinnable" Afghanistan. Brilliant!
Sen. Obama has always said we would be as careful getting out of Iraq as we were careless getting in. He has always said he would listen to the Generals on the ground and he has always said that the mission would change if he is President. If you give the military a new mission, they will sit down and develop a strategy to fullfill that mission. He never said he would withdraw all troops, regardless of what was happening on the ground. Obama has never made knee jerk decisions about anything, I think you have him confused with McCain on the knee jerk part. As for the cost of the war, it is something to consider but it isn't the only thing and your attempt to make it sound like Obama is only concerned with money will fall on deaf ears.
What people fail to understand is that we have multiple options available that heve been on the books for YEARS. Obama is simply looking at all of them & looking for a winning combination. When Obama takes office (as he has said many times) he will need to look at everything & every option & talk with military leaders to develop a winning strategy based on facts on the ground. Re deployment does NOT mean surrender (as if we have anything to surrender). We are currently paying insurgents & militia in Iraq to not fight. That's NOT sustainable in any way shape or form & it's not a strategy that makes sense to Americans.
Peace. Chap"Hussein"man.
Obama savagely attacked Hillary in the primary for basing decisions on conditions on the ground rather than a hard and fast timeline. He tried to paint her as a warmonger for that position.
Only after the primary was sewn up did he engage in this Olympics worthy lurch over in favor of "conditions on the ground" decisions.
He's in a balancing act where he tells one group of voters that he's going to save $150 billion per year by ending the Iraq war, and then spinning around and telling another group that he will use a "phased withdrawal" based on "conditions on the ground", which according to his top Iraq adviser translates into 80,000 troops staying indefinitely.
What will he actually do? Who the heck knows?
I think you are only hearing what you want. You are confusing Obama with Irrational, hot headed McCain. Why don't you take a look in your COLD HEART to see the reason why you are unfairly been critical to Obama.
The very thought of McCain/Palin Campaign managing the risks our country faces on every front should scare the American people to death, however what they are betting on is the American public treating this election like American Idol instead of the future of our Country.
Their Campaign is nothing more than a empty shell and a very ugly representation of everything that is wrong with our government and our Country.
They are tanking in the polls and in the polls of public opinion, tanking amongst themselves,their constituents and the media yet they projecting the arrogance of a famous military figure who said these famous last words...."
This is a call to all the "indians" out there to make sure the McCain Campaign suffers the same political fate of General Custer at the polls November 4th.
They can`t even manage their erratic Campaign, how could anyone think they can continue to manage the country?
,
"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 imperious 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."
Well said. Great column! Thank you~
Woohoo, thanks for your article. It succinctly lays out everythign that I've been thinking!
I wouldn't underplay greed in this. When the GOP talk about economics, there's a tinge of anger whenever someone isn't allowed to destroy whatever they want to make a buck, or when those pesky poor and middle class ( military, firefighter, police, factory workers, etc. ), get some kind of 'unfair' leg up from the system.
Their system is supposed to punish risky lenders? How's $700 billion sound? Ooh baby punish me some more.
I wouldn't put police or fire in that category. In Southern Cal, where I live, police and fire live well above middle class, and get ridiculous lifetime pensions as well.
Hey whatever happened to Jack Cafferty? Has he been forced by CNN, with pressure from the GOP, to stay low after the Sarah Palin comment about her being very very ill-prepared for VP?
Hello to all commentators,
All the commercials, pundits, gaffes, personal attacks, and the MSM will not dictate the outcome of this election. THE GROUND GAME IS WHERE ELECTIONS ARE WON, AND LOST!
Before you go to the next left leaning article to comment on, or right leaning article to start an argument with a repug (which will no doubt end with them calling you an unpatriotic socialist wimp) I suggest that you get in the game.
Please visit my personal fundraising page below:
http://my.
If you cannot afford to donate money there are many other ways to help below :
http://my.
Take a look. It is a lot of fun, and very satisfying to get involved. You will really feel as though you are making a difference.
Thanks Craig
george W bush was and is the worst president in the history of this nation..jo
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