Friday, June 8, 2012

Housecleaning

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

My wife started up the backyard fire pit and wanting to procrastinate from doing any real work, I thought I would knock off cleaning out my files and help her fire in the pit progress along.  Cleaning out file cabinets is hard for me.  I hate to part with articles as I am always sure that I will go back to them someday and need every scrap of paper I have ever read for an article, research project or client engagement. 

 

Therefore my cleaning was going slowly – until I came across a large set of documents that pertained to the mechanics of designing Basle II.  No real decision here.  While the history of Basle II will be studied for decades, and although there are many lessons to be learned – both good, but mostly bad – from Basle II, it is definitely time to move on. 

 

In fact it is time to move on with a lot of our risk thinking.  We have to focus more on stopping the next risk debacle rather than the last one.

Wednesday, June 6, 2012

PSA

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

If you are a male over the age of forty you are no doubt familiar with getting a PSA blood test done for prostate cancer.  As a test it has some advantages over “some other methods” that physicians use to check for abnormalities in the prostate.

 

PSA tests of course have been in the news lately, as the debate on whether they cause more harm than good has come full circle with the new suggestions being that the test be dropped for most healthy men.  The problem is that it produces a large number of false positives, and in the age of treating every disease aggressively this leads to a lot of aggressive treatment.

 

While prostate cancer is not a joke, it generally is a slow evolving cancer, and many men are actually better off without the cancer being treated as the side effects of the treatment may be worse than the effects of the cancer.

 

This is something to consider when we think about risk management.  Some of our risk management “cures” may be worse than the risk itself.  H. Gilbert Welch, who is a physician and author of the book “Over Diagnosed: Making People Sick in the Pursuit of Health”, is quoted in a May 29 USA Today article as saying “when you are dealing with well people, the balance is really fine: It’s hard to make a well person better, but it isn’t hard to make them worse”.  This is a balance we need to keep in mind when dealing with corporations and organizations.

Tuesday, June 5, 2012

The True Lessons of the Recession, Policy Regime & Risk Paradigm

by Don Alexander, MBA

Associate,  RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Raghuram Rajan wrote an interesting article in the current issues of Foreign Affairs (May/June 2012) called The True Lessons of the Recession: The West Can’t Borrow and Spend Its Way to Recovery. The article has a number of interesting observations on the limited policy options available to advanced countries, but also for risk management and the potential increase of financial market vulnerability to systemic risks. 

 

The conventional interpretation of the global economic recession is that growth has stagnated due to the massive amount of debt accumulated by the government and private sector in the West.  A number of policymakers have attributed the anemic recovery to lack of sufficient fiscal stimulus or inadequate demand.  However, households and governments cannot borrow the funds to spend for growth as investors are concerned about rising debt levels. 

 

Rajan suggests the problem is caused not just by inadequate demand, but by a distorted supply side.  Western countries need to address the underlying flaws in the economy and avoid the quick, politically expedient fix such as financial deregulation. 

 

The post WWII economic expansion was driven by several factors: postwar reconstruction, resurgence of trade, better educated workforces, and effective use of new technologies.  As the boom ended with high oil prices in the 1970s, western governments’ quick fixes such as deficit spending, deregulation and low rates produced mixed results and did not address long-term problems.  In addition, productivity growth remained weak in many countries that did not attempt to implement necessary structural reforms.

 

Rather, these policies produced economic distortions such as concentrated job creation, financial excesses, a distorted tax system and a growing income disparity.  Politicians tended to focus on their short-term goals and ignored worker training and education.  Currently, the educational gap between job skills required and education achievement is creating further dislocations in a number of countries.  Recent economic growth has been distorted by misguided policies and governments have limited options to restore demand quickly. 

 

The way out of the crisis cannot be still more spending and borrowing.  Politicians can no longer opt for the easiest answer, but must be held accountable for making the necessary decisions.  A return to the status quo is not the answer. 

 

The best short-term policy response is to focus on long-term sustainable growth.  Fiscal austerity will not be painless and reforms should be phased in gradually over time.  Financial excess pushed the global economy into a crisis, but a return to excessive regulation is not the optimal alternative.  Finance needs to be vibrant to encourage entrepreneurship and innovation. 

 

Industrial countries should treat the crisis as a wake-up call and deal with structural issues papered over by politicians in the last few decades.  Otherwise, the West will be exposed to a long period of anemic growth.

 

The lesson for risk management is that the lack structural reforms and a system of quick fixes will leave financial markets more vulnerable to systemic risk as seen with the euro and deficit gridlock in Washington.  

 

For more on this, follow the link: http://tinyurl.com/8y5qo2k

   

Monday, June 4, 2012

Risk Careers

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

I just got off the phone with a young woman who is interested in a career in risk management.  She is being offered a position in a major financial institution’s capital markets sales and trading program, and was wondering what my opinion was on how this might impact on her chances for success in risk management.

 

For those of you that have read my blogs for a while, you know that I think one of the major deficiencies in risk management is that there is a disconnect between those who understand risk management, and those who understand operations (whether it be how the financial markets work, or how widgets get made and sold).  What are needed is more risk managers who understand how the front office works, and more front office staff that understand what risk managers are trying to accomplish.

 

In light of this I strongly encouraged this person to start her career in the front office as I believe that will make her a better risk manager in the long run.  Hopefully I did not steer her wrong.  I would be interested in the opinions of my blog readers on this.

 

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