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

• Author: Calabria, Mark
• Position: Book review

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

Arnold Kling

Lanham, Md.: Rowman & Littlefield, 2009, 136 pp.

Arnold Kling's Unchecked and Unbalanced is a novel and insightful take on both the financial crisis and broader trends in the provision of government services. Its central point is best summarized by its subtitle, "How the discrepancy between knowledge and power caused the financial crisis and threatens democracy." This is a brief, very readable book for two distinct audiences, those interested in further understanding the financial crisis and those interested in improving the accountability and efficiency of services provided by government.

The first of the book's three chapters provides Kling's insights into the financial crisis, which also serves as his ease study for the broader, more generalized chapters that follow. Readers interested in only the general framework can move directly to chapters two and three. However, in doing so, the reader will miss the benefits of Kling's experiences as an economist at both Freddie Mac and the Federal Reserve, two institutions at the heart of the financial crisis.

While providing a concise overview of federal housing and mortgage policy, and its role in the crisis, the original contribution of Kling's work is his theory of "suits vs. geeks." A large portion of chapter 1 focuses on various permutations of suits vs. geeks, in both causing and responding to the financial crisis.

In the context of Fannie Mac and Freddie Mac, the geeks built and used sophisticated statistical models of the housing and mortgage market, and generally understood the limitations of those models. Unfortunately, in Kling's story, the geeks are not the ones making the calls. That's the job of the suits. Kling argues that the geeks often "saw lower values and higher risks in the securities than the suits, but the suits were in charge of setting corporate portfolio policy." Not mentioned by Kling, but supportive of his analysis, are the many examples at companies like Bear Stearns and Fannie Mac where not only were the geeks ignored, they were often fired for raising concerns about the companies' risk-taking.

Although Kling takes the reader through the many other causes of the financial crisis, most of these other causes have been debated and discussed elsewhere. The suits vs. geeks divide serves as the foundation of the remaining chapters.

The...