When All Else Fails, Government as the Ultimate Risk Manager

When all Else Fails, Government as the Ultimate Risk Manager, by David A. Moss, 2002, Cambridge, Massachusetts: Harvard University Press How did the government of a country known for its hostility toward government intervention and the promotion of free markets evolve into an active and aggressive risk manager? The purpose of this book is to offer an explanation. The author combines a historical perspective of the economic development of the United States, with insightful political analysis and economic theory to analyze why the government so often acts as the ultimate risk manager. The term "risk manager" is presented somewhat differently from the traditional view held by many in our field. Rather than examining the actions intended to mitigate and finance risk, the author admittedly focuses on policies designed to reallocate risk (shifting risk to another party). Limited liability, bankruptcy, and product liability laws are provided as examples of risk allocation. There are discussions on "insurance" issues such as workers compensation, social security, and unemployment insurance, but these are not the primary focus. When All Else Fails begins with a primer on the history of risk, somewhat like a condensed version of Bernstein's Against the Gods. The main theme of this chapter is to explain why private markets often fail to handle risk and why the government is then called upon to fill the void. The private sector risk-related failures are first illustrated by descriptions of adverse selection and moral hazard. In addition to these classic explanations, Moss offers numerous other scenarios in which private markets fail and categorizes them under the headings of perception problems, commitment problems, and externalization problems. The author then proceeds through U.S. history chronologically, dividing it into the following three phases: Phase I: Security for Business (up to 1900) Phase II: Security for Workers (1900-1960) Phase III: Security for all (since 1960) The three phases reflect the evolution of risk management policy as it adjusts to shifts in social priorities. The first phase includes an era in which the overriding objectives were economic growth, trade, and investment. The second phase was defined by the industrial development of the United States and growing power of labor. The third phase is defined by the expansion of the role of the government to not only protect industry and laborers, but everyone. Moss notes that the growth in risk management activity reflects an unmistakable shift in social priorities from economic growth to security over the past two centuries. Phase I, Security for Business, is covered in chapters 3 (Limited Liability), 4 (Money), and 5 (Bankruptcy). Chapter 3 describes the creation of limited liability laws designed to protect investors. The laws shifted a portion of the default risk from shareholders to creditors. The author describes events from the early to mid-1800s showing the government's efforts to increase economic growth via increased investments. The primary constraint to increased investment was the potentially devastating consequences of unlimited personal liability. Limited liability laws were enacted by states competing to lure business into their domain. Chapter 4 focuses on the recurring panics and bank runs of the nineteenth century. Lawmakers realized they needed to improve the management of the money supply and decrease money risk (the uncertainty about the value of money). Moss focuses on the risk management policies intended to achieve security in the banking sector without dramatically impairing credit and liquidity needed for economic growth. Chapter 5 describes the risk allocation benefits of bankruptcy law. The primary objective of implementing bankruptcy laws during the nineteenth century was to promote economic growth, and the result was a transfer of risk from debtors to creditors. Phase II, Security for Workers, is covered in chapters 6 (Workers' Insurance) and 7 (Social Security). …