Risk Management, PRMIA

May 23, 2008

The Trillion Dollar Meltdown and the Three Trillion Dollar War: Linking Fiscal Policy and Risk Management

Recently, I came across two books. The first one was an obvious choice,The Trillion Dollar Meltdown- Easy Money, High Rollers and the Great Credit Crash by Charles R Morris dealing with the Subprime crisis. The scond book "the Three Trillion Dollar war: by Stiglitz and Blimes discussing the true cost of the Iraq war. Reading both in sequence sets me thinking about the linkages of fiscal policy, macroeconomic management and risk management.

It appears that the contents of the two are linked to each other, like perfect fits in a jigsaw puzzle. The messege that comes across in the book is something like this-

State, even with all the hype about market capitalism, is a big ticket spender in the economy. Its fiscal policy results in the rise in consumption, savings and credit worthiness of millions. If state spending is distributed well, the credit worthiness of many in the economy go up and they are able to service their accumulated debt in a better manner. In a society already stooped in debt, the impact is even higher. If on the other hand, the spending, trillions of dollars in this case , are diverted to replacing military machinery and similar stuff, distributional impact of fiscal policy is uneven. The fiscal policy then creates the unwanted impact, decline in savings of population and consequent erosion of creditworthiness, something which the average credit/gdp ratio will definitely hide. Thereby, fiscal policy create conditions for a financial crisis, which banks and financial institutions , in their zest for greater market share, may lose sight of. Financial crisis, can, thus be seen as a fallout of lack of distributive justice in fiscal policy.

Posted by sunandoroy at 09:20 AM | Comments (3)