Failure to take account of the mismatch between the assets in defined --benefit pension plans -- primarily equities -- and the liabilities -- deferred fixed annuities -- has long been a major unrecognized source of financial instability. The underfunding problems now facing state and local...

The objective of this paper is to explore two frequently ignored principles for the prudential management of financial systems at all levels of aggregation from a single individual to a national government. One of the ironies of the current global financial crisis is that the very innovations...