Conference at Kellogg yields timely book on federal financial risk

By Amy Trang

Nearly 100 academics, researchers and policymakers met in the winter of 2007 at the Kellogg School for a scholarly discussion about the implications of risk in federal government.

	Professor Deborah Lucas Photo © Evanston Photographic Studios

Little did they know that their topic would make headlines the next year, as the government rushed to rescue an economy reeling from a credit crisis, an implosion in housing values and a plummeting stock market.

As the government took step after unprecedented step to save the economy from further collapse, more than one academic mused that the proceedings of that year-ago conference might make interesting reading for those wondering what just happened — and whether the government was on the right track in attempting such a massive rescue.

Those timely presentations and papers will be released in the form of a book — Measuring and Managing Federal Financial Risk (University of Chicago Press, 2009) — due out in early summer.

The conference of the same name was spearheaded by Deborah Lucas, the Donald C. Clark/HSBC Professor in Consumer Finance, and sponsored by the National Bureau of Economic Research and the Zell Center for Risk Research.

Nearly 100 researchers from universities, think tanks and federal and congressional agencies attended the event, where they discussed topics such as the philosophical and practical barriers to incorporating the cost of risk in federal budgets.

Lucas notes that effective financial management requires accurate metrics for assessing costs, benefits and risks. Recognizing this, the federal government has established strict federal rules for financial reporting by corporations. But the public sector has not been subject to the same scrutiny. As a result, the financial risks taken by the government are all too easily ignored by researchers and public policy makers, Lucas says.

"It hasn't been fashionable to ask about the government system, but it's important to be thinking about it," Lucas says.

Lucas grew interested in the discrepancy between public and corporate accounting standards while working as chief economist for the Congressional Budget Office in 2000. She was surprised by the lax accounting within the federal financial system, given the huge scale of government financial programs. Lucas was also struck by the difficulty in obtaining the information needed to calculate these programs' risk. Since then, she has spent much of her research time investigating federal financial risk and its cost to taxpayers.

Lucas hopes the forthcoming book will enable others to learn from the top-level thinking about federal financial risk that took place at the conference, before the subject became a matter of public debate. She also hopes it will draw attention to the risks that the public shoulders when government is not subject to transparency and stringent accounting.

"My desire is to get more academics and policymakers to improve the amount of information that is available about government financial risk," Lucas says. "I want to draw attention to the risk exposure the government has and to encourage them to make those obligations much more transparent."