Rethinking Risk

In all the replays of what went wrong with the economy, the recurring theme is the failure of risk management--by the government, Wall Street and overreaching home buyers.

Over the weekend, we get disheartening replays of how the Bush Administration abdicated responsibility for regulation and how greedy hotshots at Citibank created a mess that taxpayers will now have to clean up with billions in a bailout.

"In normal times," the Economist says in its piece on Treasury Secretary-to-be Timothy Geithner, "risk aversion damps economic cycles; in a crisis, it accentuates them, leading to withdrawn credit, evaporating liquidity, margin calls, falling asset prices, and more risk aversion. 'The brake becomes the accelerator,' as he puts it."

So we have a topsy-turvy world now in which prudence that has morphed into fear is causing the freezing of credit, and the kind of gambling that caused the problem is the prescription for curing it:

"Mr Geithner understands better than almost anyone that in crises you throw out the forecast and focus on avoiding low probability events with catastrophic consequences. Such judgments are excruciating: do too little, and you undermine confidence and generate a bigger crisis that needs even bigger policy action. Do too much, and you look panicked and invite blowback from Wall Street, Congress and the press. At times during the crisis Mr Geithner would counsel Mr Bernanke on the importance of the right 'ratio of drama to effectiveness.'”

For those of us who grew up with a Depression mentality (my parents wanted me to be a teacher because in hard times they still have jobs), this upends a lifetime of trying "not to live beyond your means."

We watch in wonder as a beleaguered government frantically throws billions into rescuing institutions that broke all the rules of our lifetime and wonder, when this is mercifully over, how will we get back to a sane balance of risk and reward to help our children and grandchildren pay for all this madness?

Fall of the Know-It-Alls

The humiliation of Alan Greenspan last week in publicly admitting his fallible perception of the housing bubble prompts David Brooks to see a larger meaning:

"This meltdown is not just a financial event, but also a cultural one. It’s a big, whopping reminder that the human mind is continually trying to perceive things that aren’t true, and not perceiving them takes enormous effort."

It's also a reminder of what has always been the motivation, aside from greed, of not only the so-called experts but the run-of-the-mill stock market investor--the psychic need to be "in the know," to be able to see more than anyone else and profit from it.

In the era of 24/7 cable financial news, it's not just the talking heads but the watchers who are constantly trying to confirm their superior perception--a modern version of the traditional gambler's search for grace in the roll of the dice or turn of the cards--the need to feel superior to the rest of humanity.

"My sense," Brooks writes, "is that this financial crisis is going to amount to a coming-out party for behavioral economists and others who are bringing sophisticated psychology to the realm of public policy. At least these folks have plausible explanations for why so many people could have been so gigantically wrong about the risks they were taking."

Maybe so, but all that social science may end up just staring at that primal urge that drives human beings to prove themselves special by being "in the know."

The Case for McCain

In a hybrid of defense closing argument and political obituary, David Brooks in today's New York Times comes forward as a character witness for "a serious man prone to serious things."

Citing his candor, humility, "crusade" against corruption and, most of all, his "impressive" years as the Iraq war deteriorated, Brooks attempts to separate that John McCain from today's campaigner "without a groundbreaking argument about why he is different" who has had to "rely on tactical gimmicks to stay afloat."

Brooks says that failure comes "in part because of his Senate training and the tendency to take issues on one at a time—-in part, because of the foolish decision to run a traditional right-left campaign against Obama and, in part, because McCain has never really resolved the contradiction between the Barry Goldwater and Teddy Roosevelt sides of his worldview.

"One day he’s a small-government Western conservative; the next he’s a Bull Moose progressive. The two don’t add up--as we’ve seen in his uneven reaction to the financial crisis."

Such personal admiration is understandable and poignant but, as this past week has shown, can't be the crucial element in a voter's decision about who should lead us out of the mess of the Bush-Cheney years, of which McCain himself, going back to the 2000 primaries, is one of the victims.

But Brooks persists in his loyalty: "If McCain is elected, he will retain his instinct for the hard challenge. With that Greatest Generation style of his, he will run the least partisan administration in recent times."

To others, based on the campaign McCain is waging, that confidence is as misplaced as associating with the Greatest Generation someone who was five years old when the Japanese attacked Pearl Harbor.

Obama Breaks the 50 Percent Barrier

As Wall Street numbers tank, the Democratic candidate rises past a milestone number in the campaign, leading John McCain by 52 to 43 percent in the new Washington Post-ABC News poll.

This "It's the economy, stupid" feat outdoes Al Gore and John Kerry, neither of whom broke the 50 percent barrier in pre-election polls while running against the Compassionate Conservative.

Part of the Obama bump may well come from his measured approach to the Congressional rescue effort, compared to McCain's yo-yo response from outrage and heads-will-roll to let's-do-it now.

Obama is taking a presidential stance of balancing the risks and rewards, while the former fighter pilot responds with his customary "let's shoot it down and ask questions later" mentality.

Voters who have been bombarded with attacks on Obama's "otherness" may be starting to feel that that risk is preferable to McCain's "more of the same." They may be watching more for signs of temperament than positions on issues in the first debate Friday night.