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The Obama administration and the U.S. Federal Reserve - along with counterparts around the world - are doing their utmost to thaw the credit freeze that took hold in the fall of 2008. But these measures, says the author, serve to show how badly the housing and derivatives bubbles deformed the economy and the global financial system. The first effect of the bailouts will be a dramatic rise in the size and cost of government borrowing, which will have serious inflationary consequences. Just as important is the transformation of the U.S. central bank into a version of the "bad bank" touted as a solution to the crisis. How disastrous the consequences will be depends on whether our appetite for risk has been increased by the bailouts or reduced by the meltdown.

In New Rules of the New Economy, Kevin Kelly urges companies to rethink their business strategies--to base their decisions on a new set of rules in which networks are everything. Easy electronic communication is indeed altering business strategies in many industries, and Kelly's book provides colorful examples and analysis of the opportunities ahead. But are networks, in fact, everything? In reviewing Kelly's book, economics consultant Peter Bernstein reminds readers that networks have been influencing businesses for centuries. Consider the railroad, which boosted living standards enormously by connecting isolated economies into a worldwide market. The Internet is just one more step in the growing interconnectedness of business, and hardly the most important. Nevertheless, Bernstein agrees that a "new economy" has arrived. Network-based opportunities are just one of several facets of this new orientation, all made possible by the regime of low inflation and intense competition introduced in the 1980s. Paul Volcker and his colleagues at the Federal Reserve gave managers the monetary stability necessary for taking risks. T. Boone Pickens and Michael Milken successfully challenged the old guard of corporate leaders that had been slow to respond to competitive challenges from Europe and Asia. The companies emerging from the turmoil of this period are intensely focused on innovation, competitiveness, risk management, and profitability. Without the environment created by Volcker, Pickens, and Milken, Kelly's highly interconnected economy could not have become the dazzling reality that it is.

The notion that the future rests on more than just a whim of the gods is a revolutionary idea. It is also a very young idea. A mere 350 years separate today's risk-assessment and hedging techniques from decisions guided by superstition, blind faith, and instinct. More than any other development, the quantification of risk defines the boundary between modern times and the rest of history. Yet is today's sophisticataed approach to risk management and decision making an unalloyed blessing? What have we gained by the transformation from superstition to the supercomputer? What does it mean that the elaborate apparatus of probability analysis has supplanted hunches and intuition in business, finance, and other areas?

Pension portfolio management focuses on the balance between risk and return on assets held. With a new ruling of the Financial Accounting Standards Board, pension fund managers and sponsors must also pay close attention to the surplus--the difference between assets and the present value of the fund's obligations to current and future retirees. FASB 87 mandates reporting of the fund surplus in terms of the net present value of the liabilities according to market interest rates on long-term bonds. Thus the sponsor must ask which assets best match the variability pattern of the liabilities. The low risk of bonds makes them attractive for meeting the predictable obligation toward today's work force and present retirees but unattractive for meeting the uncertain obligations toward tomorrow's work force. Stock and real estate are better investments for these obligations. The goal is to define the true pension fund risk, long term as well as short term. Then management can decide on the trade-off between risk and expected return.