Customer Reviews

When All Else Fails: Government as the Ultimate Risk Manager

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I bought this book on the strength of a review in The Economist and was not disappointed. With policies as varied as limited liability, central banking, deposit insurance, and Social Security, American legislators transformed government into an insurer of last resort. Sometimes they shift risk from prospective victims to those better able to afford the loss (product liability); at other times they spread catastrophic risks over the whole tax base (flood insurance). The book charts the expansion of government in the United States from the late 19th century to its zenith in the late 1970s. The author answers the objections of the Chicago and Austrian schools - Becker, Hayek, Mises, and the others - in convincing fashion thanks to its moderate tone and extensive research. The prose is clear, surprising for a book dealing with such complex subject matter. The chapter on the emergence of limited liability corporations is particularly strong. Unfortunately, the chapter on product liability could have used a bit more skepticism. Few readers will share the author's view that tort lawyers are an unalloyed blessing. The author sidesteps many of the problems we now face with exploding damage awards and wide discrepancies in the awards handed down in various jurisdictions. Nor does he grapple with the consequences these problems impose for medical research and the US insurance industry.

"Too Big to Fail"
"A risk to the economy"

We see these phrases in the media now more and more. What they imply is the mutalization of all risk i.e. the risks that individual managers take of "too large to fail" institutions will be borne by the government, and therefore all of us.

If JPM or C rolled over today - would the US government let it happen? Would the IMF? Would the BIS? Of course not. We are all implictly short a load of puts on collective market risk. This incentivizes individual managers to make riskier bets (and actually forces them to do so, if they want to remain competitive). This therefore raises the strike of these puts higher and higher i.e. things can go very badly much sooner, and individual institutions are LESS insulated from market volaitlity than they were 30-40 years ago.

Sub-prime moral hazard is playing itself out now (q1 '08). Credit creation through innovation unlocks equity and allows for economic expansion. This is a reasonable policy goal. However, Moss' claim is that this innovation (unlike in Silicon Valley), comes with a built in safety net that encourages excessive risk taking.

A better title would probably be "you Joe Shmuck taxpayer are the ultimate subsidy for risk takers...who will hoover your dough out of your pocket with bait and switch faster than three card monte."

Sure to rise on AMAZON's sales rankings, this is an excellent work that walks through the practical implications of the USGOV absorbing failed risk. I always tell my students "risk is the probability things will turn out badly" but am now thinking of switching it to "risk is the probability you'll hear `hi, we are from the government and we are here to help.' In your practical career in finance."

Soon to be on every Washington Wonk's bedside, so jump in and actually read this excellent book so you'll be ahead of the game.