Calvin Trillin’s Theory

According to Calvin Trillin (or, more accurately, the probably-at-least-semi-fictional interlocutor he meets at a bar in Midtown), the financial crisis was caused by smart people going to work on Wall Street. In the old days, the story goes, it was the lower third of the class that went to Wall Street, and “by the standards that came later, they weren’t really greedy. They just wanted a nice house in Greenwich and maybe a sailboat. A lot of them were from families that had always been on Wall Street, so they were accustomed to nice houses in Greenwich. They didn’t feel the need to leverage the entire business so they could make the sort of money that easily supports the second oceangoing yacht.”

Then, however, as college debts and Wall Street pay grew in tandem, the smart kids started going to Wall Street to make the money, leading to derivatives and securitization, until finally: “When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was.”

It’s a cute story. But there may be an element of truth to it. In their well-known paper, “Wages and Human Capital in the U.S. Financial Industry: 1909-2006,” Thomas Philippon and Ariell Reshef measured the relative wage and relative educational levels of workers in the financial sector over the last century. The picture looks like this:


The relative wage I knew about — that’s something we also charted in our Atlantic article. The relative education I did not know about (although there was lots of anecdotal evidence).

Now, Philippon and Reshef calculate relative education using the share of workers with more than a high school education; the left axis is the difference between this share in the financial sector and in nonfinancial industries. So all college students are treated equally — there’s no differentiation by where you went to college or how you did there. But there’s no reason not to think that, as finance became more complicated and required more math aptitude (see Figure 3 in the paper), the level of academic achievement went up as well.

I read somewhere that of the CEOs of the largest banks, only Vikram Pandit at Citi was a true “quant,” and he only came in when Citi bought his hedge fund in 2007, after the bulk of the damage was done. (I’m not endorsing Pandit’s job as CEO, only saying that the mess was there before he arrived.) So there probably was this situation where the executive ranks were filled with old-style relationship-builders and dealmakers, and the increasingly quantitative traders were doing things they didn’t understand. A similar story has been told about Salomon under John Gutfreund in the 1980s (and LTCM under John Meriweather in the 1990s).

Technology firms also face a similar problem. In technology, as in most businesses, the way to make it to the top is through sales, so you end up with a situation where the CEO is a sales guy who has no understanding of technology and, for example, thinks that you can cut the development time of a project in half by adding twice as many people. I have seen this have catastrophic results. Even when you don’t have the generational issue that Trillin talks about, the problem is that the sociology of corporations leads to a certain kind of CEO, and as corporations become increasingly dependent on complex technology or complex business processes (for example, the kind of data-driven marketing that consumer packaged companies do), you end up with CEOs who don’t understand the key aspects of the companies they are managing. And the underlying problem is that, for all the blather that CEOs and boards spit out about succession planning and the importance of people, the fact remains that the market for CEOs is deeply flawed, as shown for example by Rakesh Khurana.

By James Kwak

90 thoughts on “Calvin Trillin’s Theory

  1. The cream rises to the top. Our system gives our best and brightest astronomical rewards for extracting rents and fees from the productive economy. And amazingly, we don’t even call it sociopathy.

    As a wise woman once said, eventually you run out of other people’s money. If the vast mansions, multiple yachts, and lingerie model mistresses go the guys shuffling money around, who is going to create the actual, you know, wealth?

  2. Another link suggesting that the time when relative difference between financial sector pay was smallest coincides roughly with the time when the middle classes were best off:

    To repeat an earlier commenter, spelling out the cost of the current situation for the ordinary citizen would be a great way to make the theme of this blog real for (and of interest to) a wider audience…

  3. “Society is like a cup of coffee: the dregs sink to the bottom while the scum rises to the top.”

    — G. B. Shaw (?)

  4. When you mention guys like John Gutfreund that really takes me back. I started getting interested in the stock market around 1985. Louis Rukeyser was still king of Financial TV then. I remember Martin Zweig was like the Roubini of that time period. Peter Lynch was head of Fidelity Magellan then and he was like an icon. John Templeton and Buffet. And Elaine Garzarelli was still quite an attractive woman back then. She was one of the first to popularize quantitative analysis. I remember reading Chapter 8 and Chapter 20 of Benjamin Graham’s book “The Intelligent Investor” and thinking I was going to be rich someday. What an idiot……………….

  5. Is there a way to measure relative ethics? As the picture is now you seem to be saying:

    higher education = greater complexity + wages > healthy companies + economy

    Yes, we can sometimes be too smart for our own good. But, I don’t think we can put the blame on an increase in relative education. I’m not even sure it’s right to put it on stupid CEOs, but that certainly has a part.

  6. Thing is, I wouldn’t say that it’s the cream that rises to the top. Rather, it’s the best-connected.

    True story: The long-established technology business I worked for was bought up by a well-funded technology startup. Why they wanted us I don’t know — we were a software company, they were a hardware company, perhaps they were thinking of putting our software on their hardware as a network appliance of some sort. But it never happened. The VC’s pulled in a new CEO, a man who had taken a startup to a successful IPO and made millions for the VC fund. The new CEO’s expertise was… trash.

    Yes, trash. As in garbage. Waste management. Hauling rubbish to the dump. Trash. He had successfully taken a waste management company to a huge IPO, and was rewarded by his former college chums who ran the VC firm by being placed in charge of a sexy high-tech startup. Of course, he had absolutely no understanding of the business, and let the hardware guys lead him into disastrous business decisions, and never did the appliance his predecessor had bought my company to design for them. Indeed, his last decision was to a) get out of the hardware business entirely, b) shut down my employer (which was being run as a separate division, had long-established products, and was marginally profitable) and sell off its intellectual property for cash, and c) use the resulting cash to create a new software product that had no business model, no customers, no market, said product never being delivered of course since Mr. Garbageman had no more idea how to run a successful software company than he had about how to run a successful hardware company.

    Which is why high-tech innovation is at a standstill here in the USA today, outside of very rare niches: a total lack of leadership. You might not have noticed it, but there have been no (zero) new concepts to come out of Silicon Valley for the last 15 years. Every single thing we’re doing is simply extending and refining concepts that were originally developed in the 1970’s or 1980’s. The Internet is technologically no different from what the ARPANET was in 1984, just bigger and faster. Blogs are no different from the bulletin boards we ran back in the 80’s — indeed, I wrote bulletin board software in 1987 that looked an awful lot like a blog (you could post things, then people could post comments on your posts, and the comments would appear as part of your post rather than as separate posts). Today’s EMAIL system is exactly identical to the one that Erik Fair wrote in 1982. Graphical user interfaces? 80’s technology. Mice? 80’s technology. Touch screens? 80’s technology. Cell phones? 80’s technology. We’ve managed to make things smaller and faster and higher capacity, and take advantage of the newfound speed to bring to fruition ideas we had in the 70’s and 80’s that the hardware of the time simply would not support, but in some ways we’ve even gone *backwards* since then. For example, the virus infestations that afflict Windows could not exist if the security concepts of the 1970’s Multics operating system had been designed into Windows…

    Why has innovation stopped, outside of rare places like Apple where it happens but only on a small scale? Simple: Lack of leadership that understands technology. The “charismatic” leaders of the 1980’s like Steve Jobs, Bill Gates, etc. were actually about as charismatic as bricks — indeed, they’re pretty much jerks. But they’re jerks who knew the technology their companies were building and knew what they wanted to see as the final output. Do you really think a garbage man CEO could have brought out the iPhone? Or, if being handed the first prototype and encountering its deranged notion of how to do cut-and-paste, would the garbage man CEO have had the guts to overrule the marketing department and tell them “Get rid of the cut and paste” despite everybody saying that a smartphone would be impossible to sell without cut and paste? We’re being CEO’ed to death — and it’s not the best and brightest who are becoming CEO’s, it’s the best-connected, the ones who went to school with the money people. I can count the number of CEO’s who understand technology here in the Silicon Valley on the fingers of one hand, and most of them are leftover relics of the 80’s like Larry Ellison and Steve Jobs.

    The fact of the matter is that our economy has devolved into crony capitalism, where major cogs of the economy are being run by cronies of the oligarchs who own the majority of assets of the country. Thing is, crony capitalism is a lousy way to run things, because cronies are cronies not because they’re the best and brightest, but because they’re loyal. And it’s killing us economically…

  7. Poppycock. I think if I recall correctly the Skilling and Lay defenses rested on these same wobbly legs. Lay claimed he was betrayed by Skilling and Fastow and knew little about the accounting shenanigans. Skilling testified before Congress that he was unaware that Fastow et al. collected tens of millions of dollars from off-the-books transactions/shell companies. Both men were convicted. These two men destroyed a company (two if you count Arthur Anderson), at least temporarily wrecked the lives of something like 35,000 employees, and probably permanently wrecked the lives of employees close to retirement. A trifle compared to the current financial crisis.
    Robert Rubin was pulling strings at Citi and encouraging ever greater levels of risk-taking. Rubin has degrees from Harvard and Yale—before grade inflation. Henry Paulson, at the helm of Goldman Sachs, graduated from Dartmouth and has a Harvard M.B.A. Are we to believe that the market for CEO’s is deeply flawed because these men were in the lowest 1/3 of the class. Horsefeathers!

  8. the executive ranks were filled with old-style relationship-builders and dealmakers, and the increasingly quantitative traders were doing things they didn’t understand.

    If you’re a bright trader and your boss doesn’t understand what you’re doing, that’s a great opportunity — your returns are in black and white, but as far as your boss knows, your risks are whatever you say they are. That allows you to reap your rewards much faster than some Dr. Doom type who is always talking negatively about how all these instruments and strategies have obscure risks. All your boss knows is that you’ve got a perpetual profit machine and Dr. Doom doesn’t (and claims you don’t either, but that’s just office politics, right?).

    The fact that sales types are trained in positive thinking — an asset in that field, but not so much in management where it’s important to also see the downsides of things — may also contribute. Salespeople, in general, don’t want to hear about downsides. If they heard something negative, they might feel guilty about not mentioning it when closing the deal (or might even be legally liable for not mentioning it). So they teach other people not to tell them any bad news.

    Because of this “I don’t want to hear about difficulties” mindset, promoting from sales to management is as dangerous as sawing through your own brake line. But because of their people skills, they can slip in there without anyone being aware of the dangers.

  9. You’re missing the point….if you read Trillin’s entire piece one of the main points was the rising cost of education forcing everyone, even those from moneyed families, into high paying jobs to pay off debt. THAT is the main issue. The govt nobly created a student loan program for lower income students….and the scumbags of the earth (large banks, university administrators and the large corps and law firms taking advantage of indebted workforce) and you have what you have now.

  10. Nice chart. I wonder how much of this is driven by information technology in general? Nowhere else has IT penetrated as fast and as far as in finance.

    In addition to the convergence of IT and deregulation, it’s quite striking that we are devoting such a large amount of thought/effort/training to distributional activities. The thought is that these distributional activities are giving us valuable information in allocating scarce resources (“greed is good”), but the question is whether that is really true (or whether the efficiency gains are marginal or even negative).

    In other words, what that chart says to me is that the increase in pay may be less a function of a “good ole boy” network (and if you meet some of the latest quants, this squares with common sense); instead, it’s a function of how much effort society is directing into rent-seeking behavior.

  11. Yes, indeed, the middle class was best off in the middle part of last century than at either ends.

    The only thing you left out in your comment was the reason! Why, in the 1980s, would we begin seeing increasing incomes offered in the (investment) banking sector, and at the same time a widening of the income inequality gap? I’ll give you hint: it has to do with a certain former Senator from Texas and a movement to repeal the Glass-Steagall Act and policies similar to it.

  12. Traders, before 1980 from came from the streets; the best ones didn’t even have a college degree. Traders didn’t get paid much and the trading side of the house didn’t have a lot of weight. But street ‘ethics’ were very strong. Your word was your bond. You kept your word. The community was very small and people who didn’t play by the rules were easily ostracized.

    When the trading side started to gain more prominence and was able to pay traders a lot more (which did, indeed, correlate with a higher level of complexity as interest rate volatility started to make bond trading a far more risky endeavor) several things happened:

    1. It attracted a whole new cast of characters that i think of fondly as ‘scum.’ Totally motivated by the money and short term profits they would sacrifice their mothers for the buck.

    2. With the advent of securitization, traders lost the ability to short bonds. Issues were too small to cover. This took away a main tool of integrity, the requirement of a trader to make a two-sided market, which kept them honest.

    and 3. Yes, there is an important element of truth to the article; management was no longer more expert or experienced at the tasks traders were performing.

    But most importantly, another sea change happened at the same time which is that the most exclusive investment banks and trading operations ceased to be PRIVATE. In 1980, The Partners had THEIR OWN MONEY at risk. By 1986, with the ipo of Morgan Stanley, I think only Goldman was left as a private partnership. Goldman joined the rest in 1999.

    I do not think, however, that getting to the top through ‘sales’ however, is a factor. Fuld is/was a trader. He was a trader from an earlier era.

  13. weren’t there changes in the education system i.e. introduction of multiple choice tests???
    Once somebody is trained to think in that way i.e. being content with chosing between answers others have thought up isn’t he/she different from a kid who had to struggle coming up with his own answer again and again? First of all wouldn’t he/she be a lot more convinced that there are definitely right answers even to quite complex matters?

    – I have read that box ticking would be a help for kids who came from families where they didn’t get much help with language but if I look at the success later in life underprivileged kids have compared to their well connected school mates the method hasn’t performed as promised

  14. Surely in a kleptocracy the rule is “Take what you can”? If so, then Skilling and Lay were exemplary leaders, and indeed many followed their example. Lesson learned: The Enron scams weren’t complex enough. Hence a new generation of “complex,” “innovative” financial products…

  15. I read the Trillin article this morning over my first cup of coffee and didn’t give it much thought, thanks for highlighting it again for me. The graph makes it even more clear especially when one takes into consideration the simultaneous rise in the cost of higher education and the resulting financial burden that forced so many graduates into bondage at the banks when they graduated. Maybe they weren’t so evil to begin with, it was the circumstances they found themselves in that turned them to the dark side.

  16. ” … as corporations become increasingly dependent on complex technology or complex business processes … you end up with CEOs who don’t understand the key aspects of the companies they are managing.”
    Does this apply to the elected officials that will soon be managing the US Health Care System?

  17. Straw man. Nobody proposes that elected officials manage the US health care system. Do not confuse insurance with health care. No airline pilot ever got on the intercom and asked, “is there an insurance claims adjuster on board who can help a sick passenger?” Doctors provide health care, insurance just moves money from pockets A,B,C to pocket D — a function that government has a lot of competency and knowledge about doing, since that is what our government does every day.

  18. Bad Tux, I agree with you completely, but would go even further. The IPhone, things Apple Produces, and gadgets generally are just sleek packaging around some very incremental “innovation.”
    The thing about businessmen is that once they stumble on some proven way of making money, they will continue on that path of least resistance in the absense of someone making that impossible (e.g. by inventing something better). Thus, they do whatever they can to supress anything that would harm their revenue stream including real innovation.

  19. I would go even further BadTux. While it doesn’t apply to government who merely pays the bills, it does apply in spades to insurance company administrators (with totally inadequate medical background) who constantly second-guess doctors and say things that are medically necessary are not, or claim that things that are not experimental are.

  20. I think the idea that execs don’t know what they’re doing is just wrong. It’s like “whoops, I just made 25 million dollars and killed my company, oh no, whatever shall I do? I know, next year I’ll pay myself 250 million and completely destroy it”
    Some people point to derivatives and say CEOs don’t understand them. They might not understand how the price is calculated but they do understand in whose favor the errors in the calculation fall, and that’s all they need to know.
    There is this weird idea out there that CEOs are trying to make their companies successful, as opposed to simply milking them for their own benefit. For most of these guys, they get paid more and spend less time if they DON’T run their business well.

  21. Don’t forget that great legal invention called “intellectual capital”. You can’t start a high-tech company in a garage anymore, and if you able to attract VC funds, a big chunk goes to support the legal profession. But it certainly helps to consolidate the industry.

    All of our classic high-tech success stories (Gates, Jobs, Ellison) built technologies in ways that today would land them in court.

  22. another way to read the chart: IT / automation has driven out all or most of all of the low educated people in finance. finance in 1980 was mostly pushing paper and now that’s almost completely gone. margins have come down considerably, as has headcount per dollar of assets managed.

    the focus since then has been on processes that scale. that was one of the main arguments for securitization. the problem is, of course, that they didn’t actually scale. but for someone with an IT background it might not be difficult to see that scalability is not an easy thing to accomplish.

  23. > Now, Philippon and Reshef calculate relative education using the share of workers with more than a high school education….

    technology drove uneducated workers out of finance. there is almost no grunt work to be done anymore. there used to be a lot of paper pushing — that’s all been automated.

    if you compare finance to something like healthcare, you need plenty of people at all educational levels for the healthcare system. some are driving around town and moving invalids around so they don’t get bedsores — that’s a very important task, but it doesn’t require a lot of education, and it doesn’t pay well.

    that explains the relative education graph 100%.

  24. Yeah. I was thinking this as I read through the comment string. Look at Chrysler. Daimler bled it white for a decade, then discarded the shriveled hulk by the side of the road. But it was still a pile of real assets so Cerberus took it off Daimler’s hands (and got payed to do it, I think.) And who did they bring in to run the place? The guy who ruined the hardware store! Car companies need to be run by people who understand the car business. Just as much as tech companies need to be run by someone who understands the technology.

    There’s another factor similar but not identical to the point Tux made about the best-connected rising to the top. It is corporate culture that oozes down from the top. To advance you need to speak and promote the party line. Even very smart people get to believe the lie when they live it day in and day out, and get rewarded rather well for doing so.

    So, you end up with top management that does not know or understand the businesses they are allegedly running, and nobody to tell them the truth, if they were interested in hearing it.

    So – to your point – they give themselves big bonuses, and call it a day.

  25. Actually, q, it doesn’t explain anything. What you said is true, and correlates with the relative education graph from about ’70 on. But correlation is not causation.

    And it says nothing at all about the big drop during the 30’s.

  26. PAK,
    It’s very strange that I don’t see student loans/debt used either on the x or y axis. But I’m sure others thought process is much deeper than mine. At least if you’re a very productive worker in Finance your salary rises. What’s the pay difference for an excellent high school teacher and the PE coach teaching a high school health class passing out worksheets and then spending the class hour reading the sports page??? In fact let’s take the question a step further. Sometimes who makes more money, the excellent science teacher or the high school football coach who can recruit black (yes there is recruiting for high school football players now) athletes to the school district???

  27. I think there is certainly a certain truth to this overall line of argument. But re: Apple, don’t underestimate the importance of usability innovations. Yes, technically touch screens existed in mobiles before the iPhone (indeed, as Badtux points out, as far back as the 80’s), but their usefulness was so many cuts below what the iPhone offered that practically they were completely different leagues. To offer an analogy, the iPhone’s multitouch interface is pretty directly analogous to the GUI revolution of the 80’s—yes, you could do all the same things with a command line, but a GUI made them so much more accessible that computers became essentially a new technology for most people, on a practical level.

    Indeed, this larger insight can be extended to cover many changes since the Internet first came into being. Things like the web browser or Google search technology made a significant difference in how (and how much) the web was used.

  28. Well, to me your point is actually one that I’m not quite sure about: is the financial “wizardry” done on Wall Street mostly just rent-seeking (as you say); or is it distributing resources in the best possible way, so as to ultimately increase productivity?

    Now, obviously, something got out of hand in last year’s financial meltdown. But that does not mean that, in principle (and, say, with the right regulation) the financial services sector cannot be a net boon to society—it still could be more of a resource distributor, and not just a rent-seeker, if done right.

  29. Excelent point, Silke. There are many aspects of our society that have an effect on economic events, but are seldom mentioned because they appear to be unrelated to markets and money. But markets and money are both made up by people, and cannot be divorced from people’s habits of mind. We’ll flounder until we pay attention to that.

  30. I’d like to make a little prediction here. It seems very few posts in “baselinescenario” deal with macroeconomics and forecasting. But for a little moment if we can “pretend” that there isn’t a problem with a solid regulatory foundation and enforcement for banks, and “pretend” for a moment (can opener style forecasting here) that it won’t be an ALMOST jobless recovery. I think for the next roughly 36 months we are looking at an L Curve recovery. I want to kind of put quotation marks around recovery because it seems a ridiculous word to use now, especially since the jobs will be very slow to follow. But I think L Curve is the best way to describe what we can expect for the next 2-3 years.

    I encourage those who have time to look at this link written by John Shipman at Dow Jones Market Talk. He is talking about Railroad freight, which is an often overlooked economic indicator, but in fact is one of the more reliable indicators, along with demand for corrugated boxes and Trucking transport.

  31. So far, there’s no reason to believe there will be a recovery at all, much less a gradual one.

  32. The education graph on this line is percentage educated in finance compared to non-finance, so any drop could have four causes:

    1. Educated people left finance.
    2. Uneducated people entered finance.
    3. Educated people entered non-finance.
    4. Uneducated people left non-finance.

    In days gone by, what would you actually do with an education? You could be a scientist or a professor, I suppose, but academia was not that large then. You could be a professional, like a doctor or lawyer or accountant. Or you could be a banker.

    The 1930s was, to my mind, when things like electrical engineering really started to take off. We had a lot of technological innovation, in the modern sense, starting to appear then. And this innovation was performed by educated people.

    I can also think of a couple other possible causes:
    1. An increase in bank regulation required additional uneducated bureaucracy to handle compliance. (uneducated entered finance)
    2. An increase in bank regulation removed profitability from the banks and forced people to go elsewhere if they sought returns. (educated left finance)
    3. The shift from rural to urban living increased overall education levels. (educated entered non-finance)

    Obviously these are hypotheses, and would have to be tested to actually be proven, but there certainly are explanations available.

    What would be interesting to see is a graph of percentage of the financial industry who are college educated, leaving aside the non-financial industry entirely. As it is, the current graph tries to incorporate too much data into one line.

  33. ” that would harm their revenue stream including real innovation”

    you are very very right there and as getting patents on new stuff extended internationally is so high cost that only big corporations can afford to play the game inventors outside their work force are dealt very bad options
    – for one after having applied for a patent which initially is quite cheap they are in a tight time frame (which makes for a bad negotiating position) to sell it to somebody who can afford to extend it over the globe and I wish I were still in the business because to see at the paralegal level of how globalisation will go on to void the whole system would probably be very exciting and depressing.

    depressing because after all the system once gave the wonderful promise of you make your know-how available in turn we protect your revenue, which severely curtailed the monopoly granting habits of kings

    one practical question I would ask over and over would be “how can one do away with the requirement that the patent applicant has to translate?” – which raises the cost exorbitantly and which somehow does not seem right in its current form for a globalized world – countries after all have as much interest in getting patents extended to them as inventors have to file

  34. The problem as I see it (and I think as is presented in the article) is NOT so much the actual increase in the education level or even the complexity of the business plans. There were a lot of good ideas that people came up with especially when measured by the yard stick “make us more money next quarter.”

    The problem comes when the people who have risen to the oversight level are not competent to understand the eventual ramifications. So you have policy set by the “I don’t understand what they’re doing, but they’re making us lots of money” people and the people who could say “this is great while it lasts, but has these flaws and risks and is ultimately unsustainable” were generally not in positions to decide where the companies as a whole put money.

    And if you can’t understand the theory it’s really hard to heed someone who says it’s in your interest to stop something that made you billions last quarter and the quarter before that.

    Put another way, you could equally say that the problem is that the best and brightest didn’t rise fast or far enough.

  35. well my first boss ever told me how he used to make quite a good living by writing other people’s thesis before he decided to get married and settled (he was a Diplom-Kaufmann btw)
    and even after the war there was a word game about one of our universities “leicht sollst Du ihn ERLANGEN” -easy shall you get it – but Americans would never sink to such depravity or would they? (oh and btw I am one of the people who do not trust the general verdict on W. intelligence)

  36. pebird
    I would even go one step further down on the social ladder …

    in 1976 I accompanied Greek fishermen on a walk through Piräus while they were looking to buy a recycled engine. The guys doing the recycling worked in workshops under their little houses and what personalities they were – it seems most of them missed part of a finger or two they were black with oil but they were craftsman entrepreneurs through adn through

    – I thought at the time that must have been the environment that was the hot house the founders of our industries originally came from and I have ever since been looking where similar fertile ground could be in the “west” grooming people being good with money and literally grasping things at the same time
    can’t see it – instead “they” dream of churning out florists via universities, not that I grudge a florist the experience far from it but what will her hands have grasped by the time she is through? (one high placed person recently said on radio that they want to reach 90% university graduates …)

  37. “Daimler bled it white for a decade”

    not that this a consolation for anybody but to the best of my knowledge Daimler paid dearly for and suffered heavily from its hubris believing they could goldmine it

    my colleagues who had savings in Daimler stock were furious at the stupidity of it all all the time and the damage to their portfolio of course

  38. mjb
    I do not think it is a question of the smartest it is a question of being good at listening and learning which in my book requires first of all patience

    I have observed again and again that those management trained superleaders lacked one thing that quite a number of the old ones were good at i.e. when you came with an idea to them they would not pretend to have understood it after the first sentence but played dumb in a devil’s advocate’s way and make you teach it to them step by step

    something seems to have changed in attitudes and perceptiongs that makes leaders believe that having to have something explained to them by underlings is detrimental to their authority

  39. not to mention reductions in top marginal income tax rates and an artificial distinction between “investment” income and “wage earned” income that encouraged a fundamentally idle rent seeking “investor” class to take ever greater risks.

  40. the drop during the 30s was probably due to the fact that the population as a whole became much more (high school) educated whereas the skills required for working in finance didn’t change much until computers became prevalent.

    ie you needed above average education to push paper in finance in the 1910s and 1920s but that education was commmonplace in the 1930s-1970s. then all the paper pushers were fired, raising the average educational level again.

  41. Overhaul is the term most frequently used to describe what Congress and the President are trying to do to the healthcare system. By denying that they will manage healthcare you are proposing that after the overhaul they will step away, put their legislative hands in their pockets and watch the system evolve. This has not been the case for Medicare or Medicaid and there is no reason to believe it will be true in the future.
    Health insurance is not a simple conduit for payments like a credit card company but “an arrangement by which a company gives customers financial protection against loss or harm such as theft or illness in return for payment premium.” (Encarta) As such, insurance companies have contractually taken on the role of deciding what treatments will be paid for and how much. The insured is delegating a portion of his health care management to the insurance provider.
    I concede the point that the government is very good at moving money from one pocket to another. I will not concede that government is competent at doing so in the public or national interest.

  42. Speed: “Health insurance is not a simple conduit for payments like a credit card company but “an arrangement by which a company gives customers financial protection against loss or harm such as theft or illness in return for payment premium.” (Encarta) As such, insurance companies have contractually taken on the role of deciding what treatments will be paid for and how much.”

    That does not follow. It may generally be the case, especially with monopolistic companies, but in fact, the growing practice of placing corporate bureaucrats between doctor and patient is a major part of our current problem.

    “I concede the point that the government is very good at moving money from one pocket to another. I will not concede that government is competent at doing so in the public or national interest.”

    Well, there are more competent and less competent administrations. I am old enough to have grown up under competent federal government. If the monopolistic insurance companies had acted enough in the public or national interest, we would not be debating insurance reform today. As for gov’t administered health care, Medicare has been getting a huge vote of confidence, even among those who oppose current reform proposals. People like their Medicare just fine, thank you very much.

  43. If you want to understand what got out of hand and why it will continue to get out of hand take a look at Traders Guns and Money by Satyajit Das. Derivatives trading makes finance a tax on production rather than a lubricant of production. The essential financial skill is scamming witless market participants on the other side of the trade. Bank traders accumulate steady gains until they blow up. When they blow up, Fed and Treasury shovel in money. The net boon to society shows up in Greenwich real estate values and Porsche sales.

  44. Thirty years ago, I went to Kidder Peabody to meet a law school classmate for drinks. Before leaving his office, we stopped in the men’s room. While we were standing at the urinals an elderly gentleman with gray hair steps up and turns to me and says, “This is the only place around here where anyone knows what he’s doing.” After he leaves, my friend informed me, “He’s the managing partner of our firm.” Kidder later went the way of all flesh.

  45. “All of our classic high-tech success stories (Gates, Jobs, Ellison) built technologies in ways that today would land them in court.”

    Nonsense. You never could create a so called “high-tech” company in your garage. If you look at all the huge tech-firms that started in garages, they often had access to expensive equipment through school (Gates), or used to work for a different high tech company and had their own capital to invest (Sun, Google), or used their previous company’s computers to do extra work.

  46. “Insurance companies decide what procedures will be paid for an for how much.”
    You may not be old enough to appreciate this, but things worked a lot better when doctors decided this.

  47. Intel, the paragon of tech, had PhD’s in either materials science or ee leading them for almost all their history: Bob Noyce, Gordon Moore, Andy Grove, and Craig Barrett. These weren’t just run of the mill PhD’s either – Noyce’s name dots transistor equations, Moore’s got his law, and Grove & Barrett have written texts on semiconductor processing.

    The sales/mktg ceo, otellini is a new phenomena to them.

    Qualcomm’s got a PhD as CEO, as did Broadcom until recently, and even now McGregor has a master’s degree in CS.

  48. Daimler-Chrysler was a monument to Jurgen Schrempp’s ego. The stupidity of the venture was that Daimler sucked the cash out of Chrysler, put in mindless cost controls that killed quality, and installed uber-formalized German processes that stifled innovation and creativity. There were no serious attempts to develop synergies. No scale economies, because Daimler jealously protected product differentiation. The last part of the tragedy was that after a mis-spent decade some things were starting to happen that might have developed into a rational corporate concept for both “equal” partners. But Daimler management caved into their stockholders, who had no concept of what was happening internally. Bad beginning, bad middle, bad end.

    Bottom line: a once great American company reduced to rubble.

  49. So everything pretty much rested on teh invention of the transistor, and 50 years of incremental improvement in transistors has yielded the myriad of innovative ‘seeming’ products.

    The transistor replaced the tube, which replaced, to a degree, mechanical switches.

    Is there a replacement for the transistor, and do we need one? Internal combustion engines and DC motors are very much early 20th century technology, yet are ubitiquous as our method of transport.

  50. If you will not concede reality — Social Security and Medicare are incredibly efficient at moving money from pocket A to pocket B and have been spectacularly successful at achieving their goals, poverty amongst the elderly has plummeted and our elderly (those who manage to reach age 65 in the first place to receive Medicare) live longer on average than anybody else’s elderly — then there really is not much point further conversing with you. Reality simply *IS*, and is not a matter of ideology or discussion. You cannot simply dismiss reality because it disagrees with your ideology, that’s the mistake the Soviet Union made and it cost them dearly to the point of societal collapse.

    This just goes to show how detached from reality the average American has become, where perceptions gained from airline magazines and television substitute for cold hard facts. I don’t think these CEO’s are fundamentally stupid. They could learn at least enough about their business to understand the facts and figures. They don’t want to. They live in TV reality, where expertise is not necessary to be successful and where evaluating facts and figures is something geeks and nerds do, not successful businessmen. It’s all about perception, not reality, to all too many Americans. They want only enough facts and figures to validate the perceptions they’ve gained from airline magazines and television, not enough to actually contradict any of the “conventional wisdom” they’ve picked up from there. It’s groupthink that reminds me of the end game of the Soviet Union, where ideology replaced facts and any facts which did not agree with ideology were arbitrarily dismissed as “wrong”. We all know how that one turned out…

  51. I had access only to German media at the time and you would be surprised to read the hemming and hawing there was at the idea that a German could even dare to think of being so above himself that he might contemplate to interfere in the management let alone the lead in an American company – it was all written as if we were still in the early 50s – the Americans dominating always and everything and that will be terrible

    everybody writing seemed to worry about the cultural thing and at one time Schrempp confirmed the expectations by introducing a rule that on the management floor in Stuttgart only English was allowed
    – Daimler seemed to us all so crazy at the time that we would not have been amazed if only English with an American accent would have been allowed. Everybody seemed convinced that Chrysler would easily manage to dominate Daimler. There was a great fear of American style capitalism getting an even stronger hold on our all wanna-be global player managers. In short it was an especially crazy time within the whole merger crazy time.

    And just to be clear I am sorry for and furious about any job lost due to leadership incompetence and hubris anywhere especially when these idiots come up with stuff like culture doesn’t matter we now fit all the same pattern and rules and regulations can easily be transported across borders whether they comply with the existing ones or not who cares. People might get hurt – so what, let them get hurt, they are only people after all.

  52. I have a better theory.

    Those innocents at the top, knew all about it, as they maintained giant walls for plausible denials. I saw it first hand, and anyone can actually look it up.

    You hire young graduate MBAs, CPAs and lawyers who have NO IDEA, and treat them like mushrooms– keep in dark place, and toss cow stuff all over them (6 figures, a Land Rover and parking space). Meanwhile, you get down (to DC) and boogie. And if something blows up (like our two front teeth and the place next door you have to “pull” across from Liberty Street), you have an army of fall guys and girls before it ever touches Sandy, or the latest top dog, Lloyd.

    Ask around– For years, Goldman’s CEO (Lloyd, the captain of the toll booth to China), has called the 5 biggest money center banks on Wall street “the five families”. Who’s laughing now? Who laughed then for that matter?

    And the “best and brightest” lottery, or Calvin’s “smartest people” is another handy illusion, a misappropriation of Kennedy era thoughts, just like Bill Clinton’s national campaigns. It’s just a recycling of Enron criminal mastermind theories, often repeated by those self interested television pitchmen who violated the securities regs, starting with Dan Dorfman to Jim Cramer and GE’s PR wing on CNBC restated every day: “the smartest guys in the room, the smartest guys in the room, repeat after me, and bet the house with that Uzi you bought form Mike Dell on your desktop, ‘the smartest guys in the room'”

    You’ll need to break down those “smartest” people a little further chief. How many were legacy graduates from the approved MBA programs, with a real foot in the door before they ever cracked a book vs. say, how many were bright fall guys, or just useful accidents waiting to happen, like bond “rouge”, Joe Jett the young trader at Kidder, Peaboy?

    For every Michael Milken, I bet there are 20 Bonesmen working their magic from remote and more familiar locations– such as on cellphone in the back of a town car registered to Congressman Heitz 57’s widow.

    I’d agree that the third generation Wall Street families may not have “engineered” swaptions on Louie Ranieri’s CMOs and CDOS, but those quants did not call the shots, ever. They took their 250k, sent some back to bring their families over, and wouldn’t say Sh_t if they had a mouth full of it.

    You want answers? Look closely at the investment bankers, and the big 8, 7, 6, 5, 4… accounting firms, and usual suspects in law firms who brought Boston Chicken (which broke syndicated by x3 the first day– 14 to 40?). That was a historical day of corruption on Wall Street that would have never happened on our grandfather’s (my father’s) watch.

    Woodstock drop outs dropped back in and made it back to Wall Street where dad ran the show, and found the key to the liquor cabinet.

    Then look up Martha Stewart’s Omni offering– of course, interior design, why not make it the largest offering in history?

    Can you think of any insurance companies that ended in tears, but kicked off children who ended up using his wisdom to tree CNBC’s anchor and start a whole new family of index funds to extract capital from the masses? If he’s no legacy, what would you call him the smartest guy in a room of second generation clowns who can’t even pass the series 7 on the first try?

    And if you have time, look to the 200+ internet offerings in the latter half of Clinton’s watch, including Global Crossing (and it’s kickbacks to Clinton’s people). Don’t forget to revisit that talking sock puppet who hawked pet food online.

    You can easily tell the difference between those on Wall Street who were playing “Yes, Minister” and the kids of those who have been playing Joe Kennedy since Joe Kennedy. I bet the ratio of numb nut Choate grads and genius quants running things to sharp legacy guys and talent groomed by old boys would be 1 to 20, which makes Calvin’s boat story quaint, but way beside the point, like most of CT shoreline.

    “And so we beat on, boats against the current, borne back ceaselessly into the past.” It’s easy to blame Gatsby, but the theory is not so great.

  53. “you end up with CEOs who don’t understand the key aspects of the companies they are managing.”

    This also extends to the country at large. The people running the country (government, finance corporations) know nothing of technnology and manufacturing, and so have no understanding or appreciation of its importance to the economy and national security. Thus our manufacturing, engineering and R&D is offshored to meet quarterly earnings with no qualms about the consequences to our country. The Asian countries who are the main recipients of this offshoring are run by people who are technically knowledgable and so understand the importance of manufacturing and technology.

  54. Here’s how I would tell Trillin’s story:

    I was visiting a friend of mine, when she told me her son is in the basement, and refuses to change out of his pajamas. He eats nothing but cheetos and won’t look for work. Would I go talk to him.

    I went down to basement to see him, and apparently it was not true. He was in fact a columnist for the New York Times, and had this fantastic theory about “smart people” and how they had big student loans to pay off, which made them destroy our economy with derivatives.

    It was too much to witness. I fled the scene, and returned to the relatively normalcy of the Baseline Scenario.

  55. I said, ” … insurance companies have contractually taken on the role of deciding what treatments will be paid for and how much.”
    You said, ” … the growing practice of placing corporate bureaucrats between doctor and patient … ”
    These are equivalent statements therefore you are agreeing with me. I made no statement about “our current problem.”
    You said, ” … Medicare has been getting a huge vote of confidence … ”
    What’s not to like? Medicare is spending more on benefits than it is receiving in premiums. While not a free lunch for those over 65 it is a steeply discounted one.
    “Monopolistic insurance companies” According to Yahoo! Answers there are 1,257 life/health insurance companies in the US. Not very monopolistic.

  56. And office visits were $5.00, every kid had his tonsils out and new mothers got to hold their babies only for feeding.
    Warren Buffett said, “Don’t ask a barber if he thinks you need a haircut.”
    Things would work best if patients made informed decisions about their own care.

  57. Here’s some reality for you …
    “Law enforcement officials said it’s just one of the many widespread, organized and lucrative schemes to bilk Medicare out of an estimated $60 billion dollars a year — a staggering cost borne by American taxpayers.”
    Mike Potter, NBC News, December 11, 2007.
    “Medicare’s Hospital Insurance Trust Fund is projected to become insolvent in 2017, two years earlier than projected in last year’s Report.”
    Medicare Trustees Report, May, 2009.

  58. My friend Trillin (he was Y’57, I was Y’58)is right but needs to add a gloss. What came to Wall Street big time in the late ’60s-early ’70s was the computer (I was there, partner at Lehman 1967-73). The smart kids understood the computer’s uses.

  59. Even if patients were medical doctors themselves, they wouldn’t be able to make the best decisions for themselves when they are sick. CBS of the West and other doctors on this blog have made this point many times.
    Barbers are no longer surgeons. Most doctors are out to cure patients. There’s enough medical work out there to support them without them having to run up costs unnecessarily.

  60. Some facts you omit:

    Medicare expenditures are going up at only 60% the rate of private insurance expenditures. If Medicare is bankrupt, private insurance is 140% more bankrupt.

    There is no (zero, no) evidence that waste and fraud cost Medicare more than they cost private insurers.

    The majority of states have one major health insurer who dictates rates and care to doctors and hospitals. According to a 2006 study by the AMA, effective competition exists only only seven (7) states — the other 43 states effectively have medical care dictated by their incumbent monopoly insurer who leverages that in order to reduce rates and attract more businesses to their insurance pool (remember, 94% of private health insurance is purchased by BUSINESSES for their employees, not by INDIVIDUALS, so quality is not a concern, only price).

    I realize these facts contradict your ideology, but sorry, reality simply *IS*, and while you might want to live in a universe where unicorns are real and Medicare is a failure, that’s not this universe, where Medicare is the most successful and popular health care insurance program by all measures and statistics of any that has ever existed on American soil.

    If you wish to further talk health care, I suggest my blog. This blog is an economics blog, not a health care blog, and your health care trolling here is both rude and annoys people who want to talk serious policy considerations rather than swat at idiot talking points that have no data to support them. I blog extensively on health care and health care economics, which is on topic for what you apparently wish to discuss. Further off-topic discussion of health care here rather than at my blog is trolling and will not be responded to here.

  61. Here’s some reality for you speed:
    *45,000 people die every year simply because they have inadequate health insurance, or their insurance didn’t cover them adequately.
    *Most bankruptcy is due to people who got sick and lost their private insurance.
    *By that same date, absolutely no one will be able to afford either health insurance or hospital bills.
    *Insurers used to pay 95 cents of all premiums for claims, now they pay 80 and call it “medical loss.”
    *You live in the only purportedly civilized country in the world that tolerates this craziness. The WHO ranks your medical care system number 37 after all first world and some second world countries.

  62. Speed
    I live in the country with the oldest public health insurance system in the world and I can’t remember a time when I wasn’t told by somebody in the media that it’s break-down was inevitable – as I am 67 by now it must be a long time that it’s immediate break-down was proclaimed inevitable but it got patched up and amended and somehow held together providing from a patient’s point of view worry and hassle free health care to this very day and still the Kassandras out there sing the same song and still there is always somebody taking them seriously enough to feel panicked which is most certainly detrimental to one’s health and thus raising the cost of the system unnecessarily

  63. I meant to write 95 cents on the dollar of premiums collected. (Same for the 80 cents).
    And in my previous post, I meant to write that who decides how much a doctor gets paid is an entirely separate issue from whether patients should be allowed to determine certain aspects of their own treatment.

  64. You weren’t around Michael in the real olden days when those gee-whiz kids over in ol’ sheff next to the whale, they were the smart ones who knew how to use a slide rule and a logarithm table. I’d like to see what they would do on Wall Street.

  65. Yakkis, you said below (sorry the blog won’t let me reply directly): “There’s enough medical work out there to support them without them having to run up costs unnecessarily.”

    You should read Health Care Spending, Quality and Outcomes — a Dartmouth Atlas Project Topic Brief.
    “The problem is not how many physicians we have; it is how we pay them and how care is organized. I have asked physician audiences what proportion of the patients they saw in their office that day needed to be seen; many will say that only a minority of their patients needed to be seen. They are seeing the others because they need to keep their offices full to pay the rent, and because they are not paid to provide care in any other way, such as through telephone calls or email.”

  66. Silke, you said: “to the best of my knowledge doctors go to see doctors when they feel queasy ;-)”
    Most doctors I know (and I know lots) self treat, self medicate and put off everything else (invasive diagnostics, procedures and surgery) as long as possible — unless they break a leg skiing :)

  67. Yakkis, you said: “Here’s some reality for you speed … ”
    Yakkis! Take a pill. Relax. The topic here is not “Does the US Health Care System Need Improvement” — every system can be improved. The topic is “Can Congress and the President Improve the US Health Care System.”

  68. Hi Speed
    a question from afar:
    when did HillaryCare get busted?
    I assume since then “free enterprise” with all its participants with all its mighty brain power involved with all its ingenity and creativity has been busy at reforming getting health care costs covered in a way conducive to human dignity?
    After all that’s what they are supposed to be good and efficient, superior and unbeatable at, isn’t it? Or can it be that government programs like Medicare and Medicaid have so distorted the field that even the most brillant expert can’t come up with a proposal before they are eliminated?

    Another possibility is it hasn’t happened because they need more time as it undoubtably is an extremely “complex” matter which has to be carefully considered, reviewed and looked at from all angles.

    Please all you Yakkis-ses out there keep in mind that some more than 15 years is nothing but a blink if looked at from a historian’s view point. And from a historian’s viewpoint I might add it would be easiest and best to resurrect the extended family with all its virtues not least the one that clans traditionally took care of their sick members without any government interference whatsoever – also I hear that Schamans are quite effective with some ailments and the rest could be efficiently taken care of by automated call centers.

    So, Speed, how much longer do you estimate the market players will need to come up with something so brillant that the US shows itself to be also in this respect the shining beacon for the world as it is without doubt capable of doing in a lot of other fields – and yes I am being very serious on this point with absolutely no tongue in cheek.
    And the chances could be very good for that because from what I have learned by being on this blog newly constructed systems have a good chance at being a lot better for quite some time than old ones which by necessity have to have been patched up and amended again and again but nevertheless like ours has survived two world wars and still takes good care of the patients they are supposed to serve.

    Oh and btw can it be that your American doctors self-treat and do not consult a colleague as you claim because they find it too costly to see a doctor?

  69. Silke: You asked “a question from afar”
    Health Care in the US is large, complex, evolving entity with many powerful players. A forum like this tends to focus on headline items rather than taking a “holistic” or systemic view of how it has evolved, where it appears to be headed and the forces driving it. I recommend “The Innovator’s Prescription: A Disruptive Solution for Health Care” by Clayton M. Christensen et al.
    There are businesses that provide high quality health care for their employees at a per person cost far below the national average. There are new ways to provide routine, non-complex health care at a lower per-visit or per-illness cost. There are ways to lower the cost of complex but routine diagnostic and treatment procedures. While Christensen and his co-authors catalogue these with examples of where they are working I don’t hear about them in any of the Presidential or Congressional plans. In some cases there are legal barriers to widespread adoption.
    Automobiles didn’t replace horses overnight. Personal computers didn’t appear in the majority of households overnight. Jets didn’t replace piston engines overnight. Healthcare won’t be overhauled overnight either.

  70. thank you Speed
    I take it that 15 years in your book is “overnight”
    and thank you for the reading recommendation but I love revelations like yours because we “old Europeans” get told by our claiming to be very savvy journalists that the US is a master in changing and adapting and implementing etc. etc.
    … and I keep claiming that you can’t take systems from one country and force it on another but is that really an excuse for leaving so many people without adequate health cost coverage. If you want an class of uninsured and badly taken care of then say so openly but do not give me that “it’s too complicated for you to understand until you have read a pile of books stuff”
    I have been a paralegal both in personnel and in patents thus I certainly know about complicated stuff and therefore I say where there is a will there is a way – basta!

  71. Silke: I don’t have a definition of “overnight.”
    Here are some things you might like to read. I won’t put links here since the spam catchers often reject such posts.
    Search for “Quad Graphics Health Care” They operate their own (optional) health care unit which costs 20%-30% less than insurance based plans.

    “Nurse practitioners drug stores” Quick service outpatient care clinics are being operated in drug stores, staffed by Nurse Practitioners which provide better service (walk-in, no appointment required) at lower cost for many things that don’t require doctor — ear infections, kids’ sore throats etc.

    In the CBC Ideas Podcast of September 12, 2009 (Science at the Summit) one of the recipients of the Premier’s Summit Awards said that the incidence of cancer can be reduced by 50% in Canada by eliminating five or so risk factors (as I recall) which include … stop using tobacco, use alcohol in moderation, avoid sun (wear a hat, shirt and use sunscreen), proper diet and so forth. Imagine the annual savings in health care. Imagine how long it will take to change those behaviors. At least a generation.
    I’ll let you find the behaviors that lead to diabetes.

  72. Yes your theory is better. In the end it still comes down to someone at the top determining the leverage ratio. I really get tired of the “blame the quants” bit and Trillin just puts it in a new box with a new bow around it. Yawn. Yawn. Yawn.

  73. Hope you get to see this.

    You spoke of the “5 Families.” Is this just a cute reference to Lehman, Merrill, MS, etc.? Is there any basis for this name that ties-in the 5 crime families?

    In any case, you really need to stick around this blog. We’ve got some brain sucking to do, and you might even enjoy it.

  74. Good morning Speed
    I had to sleep a night on your last comment – now I think I’ve got it…:

    I do not doubt a moment that there are lots and lots of admirable ideas on how to do things better out there – after all you are Americans – and again no irony intended.

    But there seem to be great ideas that make it big without standardisation (MP3?) and others who don’t. Here is Mark Levinson telling the fascinating story of how the container was invented and all the big firms went for it but each one had its own idea of what format/system would be best and so it didn’t catch on big for years and years.
    Then came the Vietnam war of all things and the military insisted on one format of container if one wanted to be in the business of supplying them. The industry complied and after a while we had globalization – the last one is from me and I am only half joking because without a standardized shipping system a lot we are used to today wouldn’t be possible. Also I guess that when the industry standardized lots and lots of brillant technical solutions went to the garbage bin but the economy profited (at least that’s what they tell us) Here with 19:11 is Levinson telling the story himself – you can also find him with a long book talk at UCTV
    now the probably wonderfully efficient and kind projects, concerned medics have come up, will not take off by themselves without standardization/synchronisation and yes standardization will kill a lot of very good ideas. The skill of legislation will be to find a balance that leaves small wiggling rooms in which ideas can be developed and maybe implemented (which is difficult because it is the same wiggling rooms that open a system up to fraud).

    When the computer was new there was a long time when the free lance translators I sent orders to all fought tooth and nail for a competitor program to Microsoft Word. They lost and their beloved and at least for their purposes superior program vanished because compatibility with Word never came up to a level a big customer like us needed (chemical symbols). Therefore I think that even if some of your wonderful programs would hit it big they would still have the problem to make themselves compatible so people moving from one end to the other of the US (the economy is demanding the “mobile” “flexible” worker isn’t it?) can remain with what they are used to and even take it with them to India should they be told that it is that or nothing.

  75. You know, when I was in graduate school, there were still a lot of leftist fools talking about Communism “done right”.

    Now, holders of the “quasi-religious” (e.g. without empirical support) Efficient Market Hypothesis tell me the same thing.

    So I’ll ask you the same question I asked THOSE fools:

    –How do you define “done right”?

  76. The problem is not merely that those in power don’t UNDERSTAND what is wrong with these ideas –say securitization. They understood all right. Some very smart mathematicians were paid to fly in from places like Stanford and TELL them what was wrong.

    The problem is they didn’t CARE. They were making lots of money right now. The future was somebody else’s problem. And of course, EMH justifies that point of view because “all things work out for the best in the best of all possible markets”.


  77. I find the whole observation and argument to be stupid.

    Financial Darwinism would naturally lead to “brighter” people self organizing to compete for capital. If one argues that true alpha can only exist because a market participant misprices a risk that can be offset be another, then it stands to reason that more and more complexity would be needed to confuse the participants into transacting risks under mispriced economies.
    Increasingly complex packages of risk eventually become impossible to control as degrees of freedom and interdependencies balloon.
    “smart” people didn’t screw capitalism. Capitalism screwed capitalism. Financial Darwinism meanwhile is alive and well.

  78. I heard few people saying that the battles against cancer, Aids and other diseases were lost because the smart college grads went to Wall Street instead of labs or universities. In retrospective, I would say, it was a good thing they did.

  79. I was about 3 when Austin Marx and the Wall Street Wiz kids were making headlines (Time Magazine) for using computers. My father fixed his cars and became a friend. And I eventually got to speak to him on his boat off Long Island, by phone, as I pitched him NYC Munis, 6 percent at par (… what? They were commission free!)

    The role of computers and the history of technology is a fascinating topic to be sure, but if I had the time to sit in mom’s basement eating Cheetos with my CB radio and thinking about how things derailed since Louie Raneri’s CMOs got a stamp from Congress, I think I’d rather us it to interview, say “Trader” Victor Sperandeo (who started out as the personal accountant for Lehman’s partner/s), or maybe a fella like William Baumol, who really should get a Nobel prize despite of Paul Samuelson’s monopolistic textbook and the nephew’s backhand.

    Even better– I’d hail Judge Richard Posner on my shortwave, to ask what makes the consumer a king at all costs (or what makes kings of the fine folks who head up XYZ corporation that makes it so)?

    “Car 54, are you out there?”

    Were CMO’s with their puts calls, collars, butterflies, eagles and condors, and swaps really the best vehicle to repatriate all the money the blew through Walmart’s doors to China in exchange for all this decline?

    All this to say that the computer is a tool (maybe like a super duper, power tool) that did not stop or change the schemes that have existed on Wall Street and across boarders long before Joe Kennedy got his, or Brown Brother’s Union Banking Corporation was shut down.

    Computers have made things bigger and faster, but VWAPs aside, there’s ample evidence to suggest that very little has turned out to be more on the level or by the square.

    I’m thinking it’s kind of the baseline question here, and what Mr. Obama needs to sort out as he addresses the usual suspects at his $30,000 dollar dinner on Wall Street this week.

    He’d better be quick about it. Soon there will be the stories about the growth (or not) of Christmas parties on Wall Street. Where will Lloyd and Jamie book their shin digs, what will they eat, drink, as most of America asks Obama, “please Sir, I’d like some more”?

    I’m sure Ronnie/Donnie Reagan/Regan had a plan for us after beating the Russians into prosperity. Maybe all we need is a good apologist like that Larry Kudlow on the TV, and the return of leverage to normal (Woodstock levels).

    Hell, I’d love to have a good excuse to get my double breasted suits out storage and to reactivate the data plan on my Blackberry. I hear their going to make the buttons big enough for adult fingers, which would make it easy to login here at from the Netjet.

  80. well, long before gutenberg came along books were written, did the printed book make a difference? who knows gut for one it seems to have made literacy more desirable, the reformation would probably not have worked out without wider spread literacy and maybe the 30 years’ war would have been a bit shorter or longer.

    long before the computer came along there was fraud, but every paper pusher I knew would immediately come up with all kinds of stories if one said to him/her:

    “to err is human, to really foul things up you need a computer”

    (it is a saying by somebody, I forgot by whom but it is extremely popular and will always be quoted by old hands with a bitter laugh)

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