Year: 2013

Michael Lewis!

By James Kwak

On the title page of my copy of The Big Short, in black ink, it says:

“For James Kwak

With admiration”

And then a scrawl that I take to be Michael Lewis’s signature. (Christopher Lydon got the book signed for me, since Lewis was on his radio show a few days before I was.) It may be the only book I’ve ever bothered to get autographed.

So I was especially happy to read that Lewis also wants to break up the big banks (hat tip Ezra Klein):

“Along with the other too-big-to-fail firms, Goldman needs to be busted up into smaller pieces. The ultimate goal should be to create institutions so dull and easy to understand that, when a young man who works for one of them walks into a publisher’s office and offers to write up his experiences, the publisher looks at him blankly and asks, ‘Why would anyone want to read that?'”

When Simon and I made that the centerpiece of the last chapter of 13 Bankers, I thought our chances were slim. When we wrote, in the epilogue to the paperback edition, that a proposal to do exactly that had been voted down, 61 to 33, in the Senate, I thought they had changed from slim to none. It’s still a long shot, but the issue hasn’t died, and if anything is getting more attention now, what with people like George Osborne threatening to break up banks if they don’t reform themselves. Perhaps it isn’t impossible.

Tobin Project Book on Regulatory Capture

By James Kwak

One of the last things I did in law school was write a paper about the concept of “cultural capture,” which Simon and I discussed briefly in 13 Bankers as one of the elements of the “Wall Street takeover.” The basic idea was that you can observe the same outcomes that you get with traditional regulatory capture without there being any actual corruption. The hard part in writing the paper was distinguishing cultural capture from plain old ideology—regulators making decisions because of their views about the world.

Anyway, the result is being included in a collection of papers on regulatory capture organized by the Tobin Project. It will be published by Cambridge sometime this year, but for now you can download the various chapters here. It features a lineup including many authors far more distinguished than I, including Richard Posner, Luigi Zingales, Tino Cuéllar, Richard Revesz, David Moss, Dan Carpenter, Nolan McCarty, and others. Enjoy.

The Debt Ceiling Confrontation Is Playing With Fire

By Simon Johnson

Congressional Republicans are again threatening not to increase the ceiling on the amount of federal government debt that can be issued. On Wednesday, they agreed to postpone this particular piece of the fiscal confrontation, but only until May. The decision to turn the debt ceiling into some form of showdown is a big mistake for the Republicans — and dragging out the indecision is likely to prolong the agony of uncertainty and have damaging economic consequences for the country.

I made these points at a hearing on Tuesday of the House Ways and Means Committee, but unfortunately the Republican majority seems determined to persevere with its destabilizing strategy. (The hearing can be viewed on C-SPAN’s Web site; see the playlist on the right.) Continue reading “The Debt Ceiling Confrontation Is Playing With Fire” →

Another Perspective on Bad Software

By James Kwak

Last summer, Lawrence Baxter wrote these two posts about the toxic combination of bad software—actually, software in general, since no software system is perfect—and too-big-to-fail banks. Baxter knows whereof he speaks, as he was previously a technology executive at a very large bank. Here’s what he has to say about it:

I don’t care what a CIO or even a CEO might say: if they claim that they can eliminate the real risk of such missteps, they just don’t know what they are talking about no matter how good they are. And if such missteps are inevitable, then we simply cannot avoid the question whether the dangers posed by large, complex financial institutions and systems could outweigh their benefits.

Think about that the next time you hear some CEO talking about his company’s state-of-the-art technology.

More Bad Software

By James Kwak

Last week BATS admitted that its software suffered from systematic problems for four years, failing to obtain the best execution price for about 250 customers and costing them about $400,000. That should be a giveaway: no self-respecting company would break the law just to steal $400,000 from its customers. This was a programming error, pure and simple.

Also last week, a RAND study revealed that, despite billions of dollars of investment, electronic medical records have done little to reduce costs for healthcare providers. This is more complicated than a simple programming error. The issue here is that projected savings of this kind are typically based on some model of how operations will be done in the future, and that model depends on perfectly-designed software functioning perfectly. Medical records systems apparently fall far short of this ideal: as the Times summarized, “The recent analysis was sharply critical of the commercial systems now in place, many of which are hard to use and do not allow doctors and patients to share medical information across systems.”

The common feature to these stories, however, is that big, complex, business software is really, really important—and a lot of it is bad. In many niches, it’s bad because there aren’t that many companies that serve that niche, it’s hard for customers to evaluate software that hasn’t been delivered and installed yet, and there are all sorts of legacy problems, particularly with integration to decades-old back-end systems. And most of the incentives favor closing the sale first rather than making sure the software works the way it should.

I don’t have much to add that I didn’t put in my Atlantic column on a similar topic last summer. Nothing has changed since then. So I’ll stop there.

A Weak “Defense of the CEO”

By James Kwak

I finally bit the bullet and read “In Defense of the CEO,” Ray Fisman and Tim Sullivan’s article on the cover of the “Review” section of Saturday’s WSJ. The inside continuation page is headlined “When CEOs Are Worth a Fortune.” In fact, I read it twice. But nowhere could I find any evidence or even an argument that any CEOs are worth a fortune—just a lot of implying, assuming, and asserting that they are.

Continue reading “A Weak “Defense of the CEO”” →