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.

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?

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.

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?

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?

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…