This is the Cato Daily Podcast for Tuesday, July 20, 2010. I'm Caleb Brown.

Risk and uncertainty are different. Risk is measurable or at least estimable.

It exists along some distribution of outcomes.

Uncertainty is uncertain.

It's not clear where it will appear next or what impact it will have.

It doesn't behave like a risk. So how are heads of various federal agencies going to

regulate the uncertainty in the financial system? Peter Van Doren is editor of

Regulation magazine. he comments.

Frank Knight in the 1920s drew a distinction

between risk and uncertainty.

And the key distinction, as far as he puts it, is risk is things that you're susceptible to that you can measure.

And uncertainty are the things you're susceptible to that you can't measure.

That is there's some known distribution of how this thing might pan out, but there's no

no distribution of how this thing might pan out. So he draws that distinction.

So when people like Barney Frank and Chris Dodd

talk about systemic risk, what is it

that we're supposed to think that they're talking about?

Well, if you wanted to think of it as risk rather than uncertainty,

remember risk is random sampling from a universe of things with known probability.

And so you'd say, how many financial disasters have we had

and what does the universe of those things look like.

Rogoff and Carmen Reinhart's book on the history of financial crises actually

...