Belmont Club

Kling's List

Arnold Kling‘s Not What They Had in Mind is a short book which lays out why he thinks the financial meltdown of 2008 happened. It costs 87 cents on Amazon Kindle and is an easy read, as economics books go.


His basic theory is that each generation of regulators creates an unintentional policy bomb from the ruins of the most recent crisis. They prepare to fight the last economic disaster and prepare the ground for the next one. One of his key graphs is a timeline of regulatory regimes starting from the 1934 National Housing Act until the 2004 Housing Interim Goals set for 2005-2008. The regs as they stood in 2008 were just the thing to prevent the disasters of the previous decades, but unfortunately that was not the crisis they faced.

He uses the regulatory map to explain how the finance industry and government had cooked up between them a way of doing business founded on loopholes. Constrained by the regulations, every player found ways to satis-fice their positions while staying within the letter of the law. They even created off-balance sheet risks that were altogether invisible.

And what you can’t see can’t hurt you. Or so the saying goes. But in reality the entire industry was sitting on huge pressure dome of largely unrecognized risk.

Neither the regulators nor the industry were really dishonest. Not really, or perhaps better said, not technically. Each sincerely believed there was no real harm done.  But they assumed a stable situation,  in the sense that huge herd of cattle is stable. Nobody could really envision how radically things could change when a landscape of placid cows suddenly turned into a maddened sea of thundering hooves.


The seeds for much of the current crisis were sown in the policy ‘solutions’ to previous financial and economic crises. … What made the crisis possible were the illusions that key participants held …

Financial executives had excessive faith in mathematical models of risk, in financial engineering, and in the “AAA” designation of the credit risk agencies … regulators themselves encouraged reliance on agency ratings …

the regulatory community shared the illusions of the key market participants. Regulators, too, placed too much confidence in financial engineering … thought that the dispersal of risk into the ‘shadow banking system’ made the core financial system safer … that securitization was the superior form of mortgage finance.

While the housing market provided the explosive for the implosion, what weaponized it was the the structure of the industry; the build-up of risk without a corresponding reserve of real capital to meet contingencies.  The rest, as we know, is history.  Once the avalanche started assets valued on an obsolete perception became debased and fed back into the cycle of worthlessness.

Kling’s book should make fascinating reading not just for economists but also for students of war and international security. His dissection of the financial crisis contains the generic components of any crisis. Kling’s anatomy of the meltdown consisted of these four things.


1. bad bets;
2. excessive leverage;
3. domino effects; and
4. 21st century bank runs.

Kling’s list might well describe the international security situation at in the closing years of the Obama administration. In fact it might generally describe the prior conditions of any possible disaster.

The Obama “retreat” from the world in the aftermath of perceived “bad bets” by the Bush administration without an accompanying resolution of the underlying problem is an obvious parallel to the financial meltdown. The retreat had the effect of hiding risk (“excessive leverage”) without extinguishing it.

The administration’s penchant for moving a problem “off the books” or offloading it to proxies or international treaties or paper agreements can be seen as form of treaty-ization; as if such knotty problems as the Iranian nuclear breakout can be solved with an agreement — an agreement which might not even be submitted to the legislature.  The presumption is that shoving things out of sight or declaring them fixed makes them less dangerous. But maybe not.

If danger emerges we might have a run on the system, because the administration has presided over the most sustained build down of US military resources in recent memory.  The international system is undercapitalized for the level of assumed risk.  As long as confidence in the system remains high it may be alright.  But if the cows start to stampede there are not enough cowboys.


Of course parallels can be overdrawn.   Metaphors can be false. In any event history never repeats; at best it rhymes. The only way to tell if comparisons are accurate is by the possession of the actual facts. But here we come to the least controversial things about the Obama administration.

It is opaque.

It is opaque because the press has treated the administration with kid gloves. It is opaque because the officials themselves are more secretive than any past  administration in recent memory. From Benghazi to Syria; in its dealings with Russia or Iran, many pundits (including the New York Times and the Washington Post) have noted that the White House likes to play things close to the chest. There’s a tight inner circle around the president that’s in the know. The rest — including Congress and the Senate, certainly the public — are kept out.

It’s hard to see what risks are brewing under that mantle. Perhaps not even the president knows. Of course it’s possible that there’s nothing in it to worry about, but we don’t know that. Would that there were some way to measure all the ‘risk’ that’s out there — assuming there is any.

What could anyone do about risk?  Maybe policymakers could find a way to settle conflicts in a manner analogous to letting trades happen, so that pressures don’t build up towards one humongous resolution.  Or perhaps we could un-domino the world so that if something goes down it doesn’t take everything with it.  But trends appear to be doing the opposite. We kick the can down the road; we work for One World.


Of course it might be the case that we can never anticipate a coming crises or head it off because by the very nature of things we always prepare for the last one.  Maybe that’s why they used to say God Bless America, because in the end, we can only hope that we luck out.

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Did you know that you can purchase some of these books and pamphlets by Richard Fernandez and share them with you friends? They will receive a link in their email and it will automatically give them access to a Kindle reader on their smartphone, computer or even as a web-readable document.

The War of the Words for $3.99, Understanding the crisis of the early 21st century in terms of information corruption in the financial, security and political spheres
Rebranding Christianity for $3.99, or why the truth shall make you free
The Three Conjectures at Amazon Kindle for $1.99, reflections on terrorism and the nuclear age
Storming the Castle at Amazon Kindle for $3.99, why government should get small
No Way In at Amazon Kindle $8.95, print $9.99. Fiction. A flight into peril, flashbacks to underground action.
Storm Over the South China Sea $0.99, how China is restarting history in the Pacific
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