Risk on the Mind

I’ll be teaching bank regulation to the upper-level undergrads and forecasting to the undergrads and grad students this term. This got me thinking about risk. Risk is a huge issue for these subjects, obviously.

The regulation class can be tough to teach since the landscape can change so quickly and dramatically. In addition, there are so many interesting topics to discuss. Everything from the rationale for regulation, the optimal form for regulation, as well as huge issues such as too big to fail. It is an interesting class though because we almost never answer, at least in totality, many of the questions we ask. At some level we are just happy to get to a well-defined question.

Forecasting obviously deals with risk too, though in this case it is typically the case that I am trying to help the students reduce the risk of adverse events to their forecasts and in so doing improve forecast quality for whatever outcome they choose to predict.

Risk however is a really big issue. One of the consistent comments from radio callers and from the host relates to risk. There is a general complaint about the lack of accountability by people and corporations, that safety nets are too expansive and too available. I bundle these under the general headline of not enough risk. We like to tell students, where there is risk, there is reward. Is the converse true?

In particular there is a very vocal complaint (at least discussed with me) that since the financial crisis we have socialized all risk of losses and privatized rewards. The salaries and bonuses paid to rescued banks being the evidence needed to prove this point to many.

It is a topic I plan to bring up with the students to see what they think. Is there an adequate level of risk in the economy? If the answer is no, is this something holding back the recovery and the economy overall.


  • Rich Carpenter

    It may be important to note that the socialization of risk came from policy, which turned business sectors, such as banking and automotive manufacturing, into the proverbial “Commons” whose tragedy needed to be avoided at taxpayer cost.

    • David

      Completely correct Mr. Carpenter. Government assumed the risks of firms in industries that essentially went too far taking on risks and they were inadequately capitalized and could not deal with negative outcomes. A complete failure by management at these firms, and serious problems in the management of risk after the fact by the government.

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