Risk Management

Last month there was quite a stir when Michael Alix was hired by the New York Fed to help supervise banks. Alix was the former chief risk officer for Bear Stearns. Here's a bit about Alix and risk management from a 2006 BusinessWeek article:

Yet for all the risks they're taking on, banks insist they're safer than ever. They've hired many of the greatest mathematical minds in the world to create impossibly complex risk models... "Right now everything on my screen is flashing red," said Michael Alix, chief risk officer at Bear, Stearns & Co., on May 11, the day after Federal Reserve Chairman Ben S. Bernanke raised interest rates, sending the market gauges he was looking at tumbling. But "that doesn't make me nervous," says Alix. The bank has built such powerful computing systems that Alix can reevaluate every day the risks of thousands of positions across the firm's trading businesses under various stressful scenarios to be sure the firm doesn't hold too much of any risky investment at any one time. That type of analysis used to take a week to complete. "The machine works," he says.

This quote is cited in a great post by curious capitalist Justin Fox. People are rightly skeptical of risk management models, but I think their criticisms miss the mark. From what I can tell the models seemed to work just fine, but the problem was human error caused when people like Alix and his superiors dismissed the risk. This could be legitimate, since there is a tradeoff between risk and return, but as we've seen the potential spillover effects were never included in their analysis. Or they were simply ignored.

We had a fascinating conversation about this in class last night and Phil made the excellent point that a firm can only lose up to the value of the firm, even though they were leveraged to many times that value. Taxpayers were left holding the bag in order to limit systemic risk. I don't know what the answer is to this problem, but I do think we should be focusing on the incentive problems and not simply blaming technology.

Organization Models

Alfred Sloan was a true innovator and transformed General Motors into the largest car company in the world, quickly eclipsing Ford. Henry Ford was famous for eschewing organization models whereas Sloan transformed GM through his management practices. However, his successors haven't carried on his legacy. Instead of innovation we've gotten stagnation. Philip Evans of Boston Consulting Group has two amazing graphs that perfectly capture GM's current problems. The collaboration networks are from Beyond Startup: The Shifting Focus of Innovation:

versus upstart Toyota:

It's not just a coincidence that Toyota's collaboration model looks just like a brain, it really is smarter.

The Unemployment Report

Today the Bureau of Labor Statistics reported that the unemployment rate increased to 6.7% from 6.5% and that the number of jobs decreased by 533,000 in November. This was the largest decrease since December, 1974. Let's put this in perspective. In last month's report the job loss numbers for October were reported as -240,000. Through the year it looked like the economy had lost just under 1.2 million jobs.

In this report, October's estimate was revised downward to -320,000 and if we add in September's revised estimate of -403,000 then the economy has lost more than 1.2 million jobs in the past three months alone (-1.256 million.) The chart below shows the quarterly change in employment. Keep in mind that the fourth quarter only contains two months at this point so this graph understates current problems.

The economy has lost more than 1.9 million jobs thus far in 2008. And employment is a lagging indicator that usually gets worse after the rest of the economy has recovered.

Copyright on Government Works

One interesting development in recent days is that President-elect Obama has now covered the change.gov site under a creative commons license. This is interesting because government works are generally immune from copyright laws. My email is frequently bombarded with offers to buy census data on cd, data that is freely available but is simply repackaged by a private company and resold without any royalty payments.

In fact, I wasn't even aware that you could copyright government works, if you wanted to. I had several publications as a Senate staffer and any of those articles could be freely republished by anyone. It might not be ethical, but it would be legal.

A good friend, who happens to be a lawyer, was puzzled by this as well. I could understand if the site was still change.org, but now that he is under the government umbrella with .gov, it seems the site should be in the public domain. Lawrence Lessig has more, and here is the creative commons page with some info.

Universal Health Care, Bit by Bit

Jonathan Gruber also has an article in the Fall 08 issue of the Journal of Economic Perspectives, which just came out. The abstract:

The latest wave of health care proposals and laws in the United Sates has been marked by what I call "incremental universalism"—that is, getting to universal health insurance coverage by filling the gaps in the existing system, rather than ripping up the system and starting over. In this paper, I provide an overview of "incremental universalism" as an approach to healthcare reform, explore the issues it raises, and examine how these issues are being addressed at the state level, focusing primarily on the healthcare reform plan enacted by Massachusetts in April 2006. This sweeping bill altered insurance markets, subsidized insurance coverage for a large swath of the population, introduced a new health insurance purchasing mechanism (the "Connector"), and mandated insurance coverage for almost all citizens. The Massachusetts experience has led to similar proposals in a number of states, including a major (but ultimately failed) effort in California. I am far from an objective observer in discussing the Massachusetts law. I was one of the architects of the law and since 2006 have been a member of the board overseeing its implementation. Despite this bias and the fact that the ambitious Massachusetts plan is still in relatively early stages of implementation, I can say that some early results point to major successes for this reform.

Here's the link. I can't find an ungated version.

Health Care Reform

Following up on my last post, here's Jonathan Gruber talking about how health care reform can fit into the broader goal of stimulating the economy (NYT):

Given the present need to address the economic crisis, many people say the government cannot afford a big investment in health care, that these plans are going nowhere fast. But this represents a false choice, because health care reform is good for our economy.

As the country slips into what is possibly the worst downturn since the Depression, nearly all experts agree that Washington should stimulate demand with new spending. And one of the most effective ways to spend would be to give states money to enroll more people in Medicaid and the State Children’s Health Insurance Plan. This would free up state money for rebuilding roads and bridges and other public works projects — spending that could create jobs.

Health care reform can be an engine of job growth in other ways, too. Most proposals call for investments in health information technology, including the computerization of patient medical records. During the campaign, for example, Mr. Obama proposed spending $50 billion on such technology. The hope is that computerized recordkeeping, and the improved sharing of information among doctors that it would enable, would improve the quality of patient care and perhaps also lower medical costs. More immediately, it would create jobs in the technology sector. After all, somebody would need to develop the computer systems and operate them for thousands of American health care providers.

Change, Change, Change

Brad Delong wonders how the Obama administration will cope with a very heavy agenda:

The Obama administration is going to be rebuilding and reconstructing five major sectors of the American t. It has no choice--there is no other option. It has to remake:

• Autos
• Housing finance
• High finance
• Energy
• And the big one—health care

On what principles and through what procedures is this extraordinary exercise in structural economic reform policy going to be accomplished? I get how to do the macroeconomics of Obama administration economic policy. I don’t get how to do the structural side…

What strikes me about this list is that the last two are clearly policy areas where PE Obama really wants to have a major impact. The other three items are merely things he will have to deal with and I don't think they are topics Obama ever wanted to get very familiar with. Of course, reforming any one of these three areas would be a huge undertaking on its own.

Getting health care reform done would have been a major accomplishment, regardless of how you feel about his proposals, but now he has to do that on top of everything else. (HT)

The Next Social Entrepreneurs

Nonprofits rely heavily on volunteers, but most CEOs do a poor job of managing them. As a result, more than one-third of those who volunteer one year do not donate their time the next year—at any nonprofit. That adds up to an estimated $38 billion in lost labor. To remedy this situation, nonprofit leaders must develop a more strategic approach to managing this overlooked and undervalued talent pool. The good news is that new waves of retiring baby boomers and energetic young people are ready to fill the gap.

This is the abstract for a new article in the Stanford Social Innovation Review. I have a lot more to say about this and will address it in a number of future posts. It's an important topic so be sure to check out the paper (free online!).

It's Hard Out Here for a...

Tax Lawyer, apparently, via tax prof blog:

Scary news from CNN Money and the ABA Journal: Andrew Magdy (J.D. 2007, Michigan State; LL.M. (Tax) 2008, Washington University) has $150,000 in student loans and has been unsuccessful in his search for a law firm tax job. He has sent out letters and CVs to 300 law firms but has received only one interview.

A Great Loss

I have been busy these past few days and only now checked one of my favorite blogs, Calculated Risk. I am very sorry to see that Doris Dungey (aka "Tanta") passed away Sunday morning (CR). She was only 47. Besides the obvious loss to friends and family, this is a huge loss for the blogosphere. The NYT has an obitituary in the Business section (NYT).