Robert Johnson, formerly the chief economist of the Senate Banking Committee, is the director of global finance and senior fellow at the Roosevelt Institute in New York and the executive director of the Institute for New Economic Thinking.
Eighteen months into the greatest economic crisis since the Great Depression, the United States government has not enacted significant financial reform. Nor is the legislation now pending in Congress likely to deliver the profound change we need.
Managing and balancing risk in the future is an organic human problem, a political problem, and a problem of power. The question is how to remedy the fact that some players have the power to shift risks and to use the political process for insurance, while others do not.
Recent discussions of the malfunction of Wall Street have centered on the role of statistical models that failed to accurately account for all possible outcomes. These less likely results, known as "tail risks," were underestimated by the models. Now the "quants" on Wall Street and academia have a new research agenda, which is to figure out how to fix those models.