Talent and the crisis

Courtesy of Paul Krugman, here is a lovely little piece by Calvin Trillin.

It inspires the question of which percentile the regulators have been drawn from, and how this may have changed over time.

13 replies on “Talent and the crisis”

Essentially this line of argument claims that Wall Street has been undone by too many smart people becoming rent seekers. There is a nice QJE paper from 1991 that provides a theory on the implications of rent-seeking vs. entrepreneurship for economic growth.

Murphy, K.M., A. Shleifer and R.W. Vishny (1991), “The Allocation of Talent: Implications for Growth”, Quarterly Journal of Economics, 106, 503-530.

Dylan Ratigan said something similar in a non-academically rigorous way yesterday. The clip is linked on zerohedge.

It’s a very nice piece. Without looking at the papers cited (apologies – no time) it begs the question about the impact of high earning on decision-making. Certainly in Ireland the top administrators decided to pay themselves closer to top private / financial service sector level salaries…Of all the people I know the wealthiest work for the state or are providers of professional services to the state. What kind of agency effects take hold in that situation..?

In that sense those who are academically most successful are now represented amongst the highest earner in a way that we never saw before.. My point is that this idea that ‘smart’ people deserve higher pay because they are ‘smart’ has spread way beyond financial services. All this talk of the ‘smart’ economy is an extension of the fallacy at the heart of the view that this is ‘efficient’…an attempt to democratise the idea perhaps? A failure to critically evaluate the limitations of the notion of rewarding cleverness for cleverness’ sake?

First of all, the world is run by B students. They are the ones with the requisite drive to claw their way to the top of organisational structures. The A students lack the streetfighting skills B students develop in school, because for A students academic success comes relatively easily. Contra Paul, I don’t see lots of real-life, material rewards for cleverness. (Can you tell this has been an especially painful lesson for me?) Maybe they existed for a short time on Wall Street, but generally speaking nobody with money at risk cares if you’re smart; they care if you can earn.

Trillin’s piece seems to argue (with tongue partly in cheek, I hope) that the WASP inheritors of the financial establishment kept things ticking over safely for generations until the ‘white ethnics’ showed up – clever Jews, scheming Italians, knuckle-dragging but affable and hardworking Irish – and wrecked it with their dirty, declasse entrepreneurial ambitions. The noble WASP caste, though, thick and gullible as they were, simply got overwhelmed by the dazzling wizardry of these interlopers. I was waiting for the reference to the Protocols of the Elders of Zion or the Da Vinci Code. I get why someone with Trillin’s pedigree would find this sort of thing attractive (establishment leftists actually hate the working class), but for the life of me I can’t figure out why a clever Jew like Krugman is endorsing it.

I think the point of the article (which I may have partly missed) is simply that applying PhD Physics inventiveness to financial innovation and what followed was the story of Frankenstein: when the clever people stop seeking truth in their ivory tower and start seeking glory then bad things can happen.

I think I may have been wrong in talking about its spread beyond financial services…and into Smart Economy. I was thinking of Ireland but when you tell people in the rest of Europe or even the US what Irish higher civil servants earn and those who run quangos they are puzzled if not amazed.

Of course if you see a conspiracy of clever Jews at the bottom of the crisis then the view that the smart people took over and screwed things up may not be inconsistent with that view. The Jewish politics of this, if it exists, has gone over my head (though I’m not saying it doesn’t exist – but I don’t know Trillin)

Certainly I like Jon’s implication that the smart people moving in was meritocratic but no one can deny that these new clever methods of risk analysis + financial innovation + cheap money had some undesirable consequences.

Jon’s observations remind me of the 1980s when one heard anti-Semitic comments about the Tories.

One of my old teachers was fond of observing:
“If you educate criminals, you get educated criminals. These are far more dangerous than uneducated criminals”
Could universal education be the problem?

When Donagh O’Malley proposed free education in the 1960’s, there were some worries that too many people would be “educated” and nobody would want to do a manual job.

Soon after, San Francisco garbage workers (sanitation may sound better to the “educated”) got a huge pay hike and high school graduates who may not have been able to name the ocean off the Californian coast, woke up to a changed reality.

As to Ireland 41 years after free education, it’s an interesting question as to the percentage of “educated” today among the people who have education.

As for Wall Street, there is an interesting distinction between intelligence and wisdom.

David Halberstam in the “The Best and the Brightest,” his scathing indictment of the Washington policy makers who crafted and escalated the Vietnam War, asked: “If they were so very smart, how could they have got it so wrong?”

Last December, New York Times columnist Frank Rich wrote on the “Pavlovian ovations” of media colleagues to Barack Obama’s economic policy appointees, such as Summers and now Treasury Secretary Geithner, who he termed as both protégés of master of the universe, Robert Rubin.

Rich said: “In his 20th-anniversary reflections, Halberstam wrote that his favorite passage in his book was the one where Johnson, after his first Kennedy cabinet meeting, raved to his mentor, the speaker of the House, Sam Rayburn, about all the President’s brilliant men. “You may be right, and they may be every bit as intelligent as you say,” Rayburn responded, “but I’d feel a whole lot better about them if just one of them had run for sheriff once.”

Halberstam loved that story because it underlined the weakness of the Kennedy team: “the difference between intelligence and wisdom, between the abstract quickness and verbal facility which the team exuded, and true wisdom, which is the product of hard-won, often bitter experience.” That difference was clearly delineated in Vietnam, where American soldiers, officials and reporters could see that the war was going badly even as McNamara brusquely wielded charts and crunched numbers to enforce his conviction that victory was assured.”

Rich said for some of JFK’s best and brightest, Halberstam wrote, wisdom came “after Vietnam.”

The New York Times reported in November 2008 that in September 2007, Citigroup’s then chief executive, Chuck Prince, had learned for the first time that the bank owned about $43 billion in mortgage-related assets! On January 2, 2009, Citigroup said that Robert Rubin had resigned as a senior adviser and would not seek re-election as a board director. Rubin told The Wall Street Journal his pay was justified and that there were higher-paying opportunities available to him. “I bet there’s not a single year where I couldn’t have gone somewhere else and made more,” he said. Asked if he had any regrets, Rubin, who had been termed by President Clinton, the greatest Treasury secretary since the first one, Alexander Hamilton, said: “I guess that I don’t think of it quite that way,” adding that “if you look back from now, there’s an enormous amount that needs to be learned.”

So Goldman alumni Robert Rubin, who earned $17.0 million at Citi in 2008, admitted he was not aware of the detail of collateralized debt obligations (CDOs) and other subprime-related securities on the group’s balance sheet.

He was intelligent and earned over $100 million at Citi after leaving Washington, but was he a smart director?

There is no doubt here that those at the top of the Civil and Public Service are the richest and least troubled by the present recession/depression. If you have been reading the papers lately who are the Big earners in Ireland – Prof Drumm, CEOs of ESB, Bord na Mona, FAS etc. In the Universities it is the same with Profs on €450,000 pa i.e. Begley at UCD etc etc. Thick TDs and Senators earn €70K to €110K plus €150K pa in expenses. I know from the coterie of my friends at College those that went into the Safe Sectors have a fantastic lifestyle. Idiots like me that decided to try our hand at running a business are just not at the races. The end result of this stupid mess is that Entrepreneurship in this country will decline and those that are risk takers will take themselves to places where they will be appreciated.

The National Guard units in Iraq and Afghanistan were taken out of a recessing economy and created jobs for others keeping employment rates low. Conscripting millions also kept rates low.

Using radioactive weapons which become aerosols and are also chemically poisonous means VA benefits are curtailed in the long term, reducing costs. Sending violent men and women to their deaths far away, with no Vietnam coverage means no public outcry. Another problem solved. War makes money. But not for the serfs.

They are smart alright. This is not conspiracy theory. Will the EU adopt similar policies? Why not? Germany sent fighters to blow up petrol tankers next to poor thieving civilians. Seig Heil! Wake up!

Why have populations always migrated from Ireland? Those factors are being stitched in if Nama passes!

I admire the cold hard cunning of the US elite. Remember hurricane Katrina and New Orleans? Many nice new suburbs have been cleansed. At no cost to the elite.

Entrepreneurship has been dead for a while. NY (New Amsterdam) was set up by Dutch-Jewish stock. The original name for the Netherlands was Spanish something. Spain integrated the Sephardim against their will. The Inquisition made it clear that they were not safe in Spain. Many “protestants” were inspired by Sephardic intellects.

They own all of America more or less. Their managers earn a fortune depending on their efficiency.

Boston or Brussels?


It’s a funny country indeed when the minister Micheál Martin, who was in charge of enterprise policy for 4 years, and would be entitled to an annual pension of  €123,000 now (ministerial pension of €70,000 from his 12 years as a minister, with approximately €53,000 more coming from his eight years as an ordinary backbench TD) excluding a top up pension as a teacher, told reporters in Brussels last April that he would not give up his teaching job in Cork, which has requires the employment of temporary substitute teachers over 20 years.

“If anything happened tomorrow morning with regard to my political career, I’m not going anywhere in a hurry, there is another 20 years to go; [but] you have to take these situations into consideration,” he added.

Maybe we could vent on RTÉ’s Liveline and get a little empathy from a public staff member on 12 times the average industrial wage!

Perhaps the problem wasn’t the smart guys coming up but the dullards at the top kept there through nepotism and the old boys network. Basic stupidity and incompetence would have been found out either by technological advances and the changing commercial landscape. The fact that this happened before on the dullards’ watch is also testament to their fallibility.

It is apparent that even the smartest aren’t smart enought to avert these avertible disasters. Stupid creatures that we are, we still can’t get past thinking “if only I had been in charge I would have stopped this”. The logic of the article is just the stupid man’s version of this fantasy.

Still, it was a good conversation starter…

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