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GOVERNMENT BAILOUTS INCENTIVIZE RISKY INVESTMENTS - TAXPAYERS PAY THE PRICE, WITNESSES SAY
Sep 11, 2009 (Congressional Documents and Publications/ContentWorks via COMTEX) --
House Committee on Science and Technology
Subcommittee on Investigations and Oversight
Republican Caucus
Paul Broun, m.d. (R-GA), Ranking Member
http://gop.science.house.gov
September 10, 2009
Press Contact: Zachary Kurz
zachary.kurz@mail.house.gov
GOVERNMENT BAILOUTS INCENTIVIZE RISKY INVESTMENTS - TAXPAYERS PAY THE PRICE, WITNESSES SAY
Washington, D.C. - Today the Subcommittee on Investigations and Oversight held a hearing to examine the role of risk modeling in the global financial crisis. Risk models were discussed as a factor that contributed to last year's economic downturn. Another factor that witnesses said contributed to overly risky investments is the concept that companies were deemed 'too-big-to-fail.' By providing a safety net for traders and institutions, the federal government has created a perverse incentive for trading in complex and risky financial instruments.
"Despite the pursuit of a scientific panacea for financial decisions, models are simply tools employed by decision-makers and risk managers," said Subcommittee Ranking Member Paul Broun (R-GA). "Ultimately, decisions have to be made based on a number of variables, which should include scientific models, but certainly not exclusively."
Testifying today before the Subcommittee, Dr. Nassim Nicholas Taleb, Distinguished Professor of Risk Engineering at NYU-Polytechnic Institute and the author of Fooled by Randomness and The Black Swan: The Impact of the Highly Improbable, described the current system as "capitalism for the profits and socialism for the losses," referring to investment bank executives who receive huge bonuses, while the taxpayers bail out their companies and suffer financially. Taleb also recalled his time as a Wall Street trader being told on numerous occasions not to worry about extreme risk, since the government would ultimately bail out the institution.
Further underscoring the inaccurate models that contributed to the economic crisis, Mr. Christopher Whalen, Managing Director of Institutional Risk Analytics said, "When investors, legislators and regulators all mistook models for markets, and even accepted such speculation as a basis for regulating banks and governing over-the-counter or OTC markets for all types of securities, we as a nation were gambling with our patrimony."
The following witnesses also testified today before the Subcommittee: Dr. Richard Bookstaber, Financial Author;
Dr. Gregg Berman, Head of Risk Business, RiskMetrics Group;
Dr. James G. Rickards, Senior Managing Director, Omnis Inc.; and
Dr. David Colander, Christian A. Johnson Distinguished Professor of
Economics, Middlebury College.
This is the second in a series of hearings on the role of science in economics and finance. For more information on today's hearing, or to read witness testimony, visit the GOP Science and Technology Committee website.
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