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How the Obama Administration is Like AIG

April 1, 2009

Noam Scheiber writes of AIG in the current issue of The New Republic that:

The real problem was more fundamental: Companies that deal in risk have a natural tendency to take on too much of it, whether they’re arranging homeowner’s policies or elaborate arbitrages. Over time, a steady march of profits desensitizes them to the dangers they once sweated; even institutional checks begin to weaken.

Which is why the difference between a successful risk enterprise and an unsuccessful one often has less to do with the complexity of its schemes than with its leaders’ fanaticism about discipline. It was, among other things, the lack of such leadership at AIG in recent years that made the company a ward of the state.

This seems plausible with respect to AIG. And probably even more true with respect to governments. Has anyone else noticed a lack of sensitivity to risks and dangers of new policies and the weakening of institutional checks on the actions of the federal government recently? Where is the fanacticism about discipline with respect to risky new schemes in the current administration? No, really, where?

In fact, for all the reasons identified by the public choice economists, the government is likely to be even worse at running things than the private sector. That’s why institutional checks and institutional modesty should be the order of the day when it comes to government initiatives. Too bad Barack Obama does not appear to understand this.

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