Hullabaloo

Friday, July 10, 2009

 
Depressions And Quants

by digby

Chris Hayes has written an excellent, accessible overview of the two main economic arguments at play at the moment between those who believe that depressions are a kind of necessary economic tough love and those who believe that they are the outgrowth of human error or greed which can and should be prevented.

Of the first, he writes:

Famed economist Joseph Schumpeter said that "a depression is for capitalism like a good, cold douche," one that rinses off accumulated dysfunction. Robber baron Andrew Mellon (who served as Herbert Hoover's treasury secretary) welcomed the Great Depression with these infamous words: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people"

It's not hard to find this same view among bankers, financiers and sundry Wall Streeters today. Recently a bond trader told me he hoped that the Fed would raise interest rates and plunge economy into a truly deep, painful (but he hoped, quick) depression. "I don't think that would be good for you," I said. "Oh, I'd be fine," he responded. ( I meant politically: as in, there'll be people with pitchforks at
your door. We were talking past each other I suppose.)

There's no question that economic contraction feels quite different to a bond trader and an unskilled worker. A spike in unemployment hits those on the margins of the labor market the hardest, while contractions also usher in deflation, which has a strong tendency to make the rich richer. But the faith in the salutary effects of
economic misery also derives from a puritanical view of the economy, one that can manifest itself on both the left and right. Under this view contractions are collective punishment for our trespasses; we are sinners in the invisible hands of an angry God.

Of the second:

Paul Krugman, to put it mildly, disagrees. In 1999 he published a book
with the prescient title the The Return of Depression Economics and the Crisis of 2008. While folks like Samuelson and Robert Lucas were celebrating the fruits of neoliberalism, a strange thing was happening: Financial crises of larger and larger scale and scope were wreaking havoc on the global financial system. Mostly, as Krugman notes, we ignored the tremors.

[...]

These crises tended to have a few things in common, but at the heart of many were central banks, governments and international lending institutions that had learned the lessons glossed in Samuelson too well. Low inflation became a central obsession of the so called "Washington Consensus," the term given for the uniform prescription of stiff free-market medicine -- balanced budgets, privatization of government services, and tight monetary policy -- that dominated global economic policy in the 1980s and 1990s.

What animated much of this advice was not just a rigid and dogmatic economic consensus, but also the puritanical normative assessment that a wicked economy must now pay its penance. (Of course said penance was never paid by those who caused the crisis: It was paid out of the pockets of the starving, the poor and working class.)

Read the whole thing. It's very clarifying.

Hayes' trader acquaintance assured him that he would be fine and I'm sure that's exactly what he meant. The financial elites are never held responsible for their mismanagement. It's Blacks who bought house they couldn't afford and day traders who shouldn't have been dabbling in things they don't understand and social climbers who fail to know their place who cause all the problems. Economic puritanism requires punishment, but it is more of a symbolic ritual to prove somebody will pay for failure --- just not those who perpetuated it.

In a slightly similar vein, I would recommend this article in Vanity Fair about "The Man Who Crashed The World" Joseph Cassano, of AIGFP. The author, Michael Lewis, describes his conversations with our old pal Jake DeSantis the millionaire WATB who snivelled to the NY Times that he and others at AIGFP were being unfairly blamed for the collapse of the financial system and that denying them their bonuses was, like, totally bogus because they'd worked 14 hours a day! Lewis seems to think that DeSantis was something of a hero because he single handedly turned the argument away from the bonuses because when they read his letter, people realized that these guys were just hardworking sods being unfairly demonized. I don't know what he's been smoking, but he's delusional if he thinks that NY Times op-ed, rather than severe pressure from America's owners, was what forced the political class to back off. Please.

The upshot of the article is that Joe Cassano was a bullying moron who intimidated all the poor little DeSantis' into following his orders in spite of the fact that they made no sense. And he apparently intimidated them into stuffing their pockets with tens of millions of dollars while he was at it.

I'm not buying it. I have no doubt that there were rash, aggressive jackasses like Cassano in varying levels of power throughout the financial industry during the period, but it's simply not credible that all the good, smart "quants" who worked for them were forced to participate against their will.

At the end of this article I couldn't help but wonder if the fact that Cassano was a working class striver among the elite Ivy boys doesn't merely explain his own motivation for taking obscene risks, but also the motivation of all these little birdies who whispered in Lewis' ears about how stupid and boorish he was. "Some people" just have no business being among their betters. And once you let them in, they trash the place.

My feeling is if the quants knew this guy was a moron who was going to crash the world financial system and they did nothing about it, they are more responsible than he was. After all, they're allegedly the smart guys. Instead, they took the money and then whine like little babies when they got blamed. Sorry, I have more respect for Cassanno at this point than them. At least he's not pretending to be a victim.




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digby 7/10/2009 01:30:00 PM |