Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy.

• Author: Liebowitz, Stay J.
• Position: Book review

Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens

Democracy

By Arnold Kling

Lanham, Md.: Rowman and Littlefield, 2010.

Pp. xii, 122. $29.95 cloth.

Arnold Kling's Unchecked and Unbalanced, a timely, ambitious, and short book, covers two main topics: the financial meltdown of 2008 and the potential causes of modern government failure. The first chapter, on the financial crisis, serves up the financial crisis as an example of government incompetence. The second chapter explains changes in governance that might have led to increasing incompetence over time. The third chapter provides examples of how the provision of government services might be reinvented to make it more efficient and responsive to the public's desires.

I agree with Kling's claims that the financial crisis resulted more from government intervention than from the excesses of private firms that were insufficiently regulated. I also sympathize with his claims that government is not sufficiently responsive to the desires of its citizens, that politicians have too much power, and that we should try to improve both of these conditions. The question is whether his particular analysis, which seems to be quite original, actually gets to the main source of the problems and whether the recommendations emanating from his analysis can remedy such flaws to an important extent. On these scores, I am not convinced.

The book's strongest part is the discussion of the financial crisis. The author is well positioned to discuss this material because he worked for both the Federal Reserve and Freddie Mac during the 1980s and the first half of the 1990s. Although he was not working for those organizations during the run-up to the financial crisis, he understands how they work and the economic issues that would arise from the financial crisis.

He assigns major responsibility for the mortgage meltdown to regulations of bank capital requirements that rewarded financial institutions for holding securitized mortgages with low down payments rather than holding nonsecuritized mortgages with higher down payments. He understands that mortgages with low down payments were at the root of the problem, but although he mentions the problems caused by housing speculators, he does not connect the dots for the reader to show that mortgages with virtually zero down were an almost irresistible speculative investment because they allowed housing...