Category Archives: Commentary

No, You Can’t Get a Drink at 5 AM

By James Kwak

I’m in the United Club at SFO waiting for a flight, and the bar is closed until 8. So much for business travel.

I just published a post over at Medium that is really about two things: how both airline marketers and on-campus recruiters perpetuate the idea that air travel is glamorous, even when all of us know that it isn’t. It’s sort of a sequel to one of my favorite posts of those I’ve written, “Why Do Harvard Kids Head to Wall Street?” which I think is the one Paul Tough mentioned in his book about grit. Now that it’s recruiting season in the Ivy League, I thought it might be useful.

Also, last week I wrote a post about the HP breakup and what it implies about corporate management.

Cultural Capture and the Financial Crisis

By James Kwak

A few years ago, while still in law school, I was invited to write a chapter for a Tobin Project book on regulatory capture. It was a bit intimidating, being part of a project that included luminaries like David Moss, Dan Carpenter, Luigi Zingales, Richard Posner, Tino Cuellar, and the deans of two of the best law schools in the country. I was asked to write something about an idea that I had slipped into 13 Bankersalmost in passing, about the cultural prestige of the financial industry and the political and regulatory benefits the industry derived from that prestige. My chapter turned into a discussion of the various mechanisms by which status and social networks can influence regulators, creating the equivalent of regulatory capture even without traditional materialist incentives (cash under the table, promises of future jobs, etc.).

Two weeks ago, an investigation by ProPublica and This American Life illustrated the culture of deference, risk aversion, and general sucking-upitude among New York Fed bank examiners that effectively resulted in the capture of regulators by the banks they were supposed to be regulating. As David Beim wrote in a confidential report about the New York Fed, the core problem was “what the culture expected of people and what the culture induced people to do.”

I wrote about the story for the Atlantic and referred to my book chapter, but at the time the chapter was not available for free on the Internet (at least not legally). The good people at the Tobin Project have since put it up on the book’s website, from which you can download it (legally!). Note that they are only allowed to put up one chapter at a time and they rotate them, so this is a limited-time offer.

Game of Thrones, The Wire, and the New York Fed

By James Kwak

I wrote a column that went up this morning at The Atlantic about the ProPublica/This American Life story about the New York Fed. The gist of the argument is that we all knew the New York Fed was captured; for people like Tim Geithner, that’s a feature, not a bug.

There was a paragraph in my original draft that I really liked, but I can completely understand why the editors didn’t want it:

“When Tyrion Lannister wants his son killed, he sentences him to death in public. When Avon Barksdale wants potential incriminating witnesses killed, he obliquely lets his lieutenant know that he’s worried about loose ends—because he doesn’t want his fingerprints (voiceprints, actually) visible. When senior New York Fed officials want their staff to go easy on Goldman Sachs—well, they don’t need to lift a finger. The institutional culture takes care of it for them.”

This is similar to the idea at the core of “The Quiet Coup,” the Atlantic article that had a million page views back in 2009. In a less well developed political system, rich businessmen buy favorable policy by passing money under the table (or hiring politicians’ relatives, or giving them loans and then letting them default, and so on). In the United States, for the most part, you don’t have to do anything illegal: the system takes care of it for you, whether it’s bailout money from the Treasury Department or regulatory forbearance from the New York Fed. That system is a combination of personal incentives, cultural capture, and institutional sclerosis.

In short, buying politicians (or regulators) is good. Not having to buy them in the first place is even better.

New Collection on Medium

By James Kwak

I’ve joined a new collection on Medium devoted to business and finance writing. It’s called “Bull Market,” after an intense lobbying campaign (including alleged vote-buying, although I haven’t tried to collect) by Felix Salmon, and includes Felix, Mark Buchanan, Dan DaviesAlexis Goldstein, Francine McKennaEvan Soltas, and Mark Stein. The goal is to write thoughtful articles that don’t just respond to the latest story on the wire (although there will be some of that, too).

My contribution for today is a post about the no-poaching lawsuit in Silicon Valley and what it says about class consciousness in America today.

I hope you enjoy the collection.

An Elizabeth Warren for New York

By Simon Johnson

These days, almost everyone likes to complain about institutional corruption – and various forms of intellectual capture of government orchestrated by big corporate interests. But very few people are willing to do anything meaningful about it.

Zephyr Teachout is an exception. Not only has she written about the history of political corruption in the United States, both in long form (her recent book) and in many shorter versions (e.g., see this paper), she is competing for the Democratic nomination to become governor of New York.

In many countries, Ms. Teachout would sweep to victory. She has smart ideas about many dimensions of public policy (here are her economic policies), she has assembled a strong team, and – most of all – she represents exactly the kind of responsible reform that we need at this stage of our republic.

Elizabeth Warren offered exactly the same sort of promise to the people of Massachusetts in 2012 – real reform through pragmatic and effective politics. She has delivered on this promise and there is every indication that her influence will only grow in the years to come. Continue reading

How to Get Thrown Out of a Luxury Hotel

By James Kwak

That’s one of the subplots of Big Money, by Politico reporter Kenneth Vogel, a book that I reviewed for yesterday’s issue of the New York Times Book Review. You can read that review, so I won’t re-review it here, except to say that if you were wondering how political operatives get rich people to part with their money, you’ll find out here.

Larry Summers and Finance

By James Kwak

I think some people didn’t understand the point I was making about the question of whether the government made money on TARP in my earlier post. Summers said, “The government got back substantially more money than it invested.” This is true, at least if you give him some slack on the word “substantially.” The money repaid, including interest on preferred stock and sales of common stock, exceeded the money invested.

My point begins with the observation that, as of late last year, the government had earned an annual return of less than 0.5%. My point itself is that it is silly to evaluate an investment by whether or not it has a positive return in nominal terms. You can only meaningfully evaluate an investment by comparing it to some benchmark. Saying that a nominal return of 0.5% is greater than 0% is meaningless, since the 0% benchmark is meaningless. Most obviously, it doesn’t account for inflation; since inflation has been about 1–2%, the government lost money in real terms.

Continue reading