THE CAUSES AND CURES OF THE FINANCIAL CRISIS

An article I read, titled "The Causes and Cures of the Financial Crisis," by Ira Robbin described the recent financial crisis of America as a "financial tsunami." This article discussed the far-reaching problems caused by this tsunami and how lessons learned from it will be seen in risk management practices for years to come.

The article is particularly aimed at actuaries, and describes them as the premier enterprise risk professionals who will be able to share substantial insight into what went wrong and the implications for the future.

The article descries the causes of the financial crisis as simple. Saying that now there is "little confidence in balance sheet valuations because too many assets are overstated, too many liabilities are understated, and too much information is hidden. The crisis has spread due to a systematic failure of the regulatory system. Over the last 20 years regulations that fostered market stability were eliminated, and new financial instruments were allowed to propagate without any real oversight."

Robbins also details ways to get ourselves out of this financial crisis, saying that instead of bailing out weak financial firms, we should be liquidating them. Additionally, all doubtful assets need to be written down as soon as possible, and all accounting should be clear and transparent.
Robbins explains that "Government can help in this effort to clean up our accounting system. But it needs to stop being an investor propping up those that should be in the morgue. It needs to conservatively regulate all financial instruments. It should foster liquidity and stoke demand.
That is what needs to be done to get out of this crisis."

I think that it will be interesting to see the new risk management techniques and ideas that stem from this recent financial crisis, and particularly the role of actuaries in solving these problems.