By: masaccio Sunday November 1, 2009 10:30 am
Calvin Trillin explains that the cause of the great crash of 2008 was all the smart people who went to Wall Street. Once upon a time, the big jobs on Wall Street were filed with third-raters, the guys who slept through Rocks for Jocks at Ivy U. They got their jobs through their parents or their friends or people they charmed at homecoming. Their dreams were modest, a house in Greenwich and a sailboat.
Of course, Trillin makes this banal insight a joke, claiming that the old boys were only mildly greedy, but then Wall Street started importing really smart people, and making mountains of money. The third-raters weren’t able to comprehend the risks, but loved the buttloads of moolah (you gotta love Margaret and Helen) they were making. The smart people didn’t understand the risks either, but they pretended to, and uncontrolled greed led to the crash.
The humor masks the ugly reality. The standing joke in law school is that the A students become professors, the Bs become judges, and the Cs become millionaires,; or as we used to say in college, the business guys hired the engineers, and the science guys become professors.
The most obvious bad thing about smart people going to Wall Street is that it means we don’t have productive jobs for them in the fields they are trained for. If a bunch of physicists are working for Goldman Sachs, it means they aren’t doing physics. It means we don’t have work requiring physicists or their training. It means we are falling behind the countries that do have work for physicists. How many chemists do you think China has working in finance?
The second bad thing is the way financial elites make money. Floyd Norris gives a good picture in this column. They charge high fees, and hidden fees. To justify those fees, they have to produce huge returns, which they do by leverage. They rely on complexity and deception, particularly in swaps and derivatives. Wall Street has become more concentrated. All of these things are dangerous to the rest of society, which has to bail those incompetents out when they fail.
The third bad thing is that they aren’t doing the one thing we need for them to do: allocate capital to its best use. As Norris points out, dumping money into asset bubbles is a giant fail.
Many of the financial innovations of recent years were not designed to increase operating profits for customers. Instead, they sought to avoid taxes, or make accounting statements look prettier, or get around regulations seeking financial safety. At their worst, they boiled down to an offer to charge a customer a dime for letting him evade 20 cents in taxes. Such transfers do nothing for the larger society.
The academic justification for unbridled markets was financial innovation “to meet central problems”, as Robert Schiller explained earlier this year. Innovations like auction rate securities and securitization of viaticals illustrate the bankruptcy of this theory, and could only emerge from bored smart people looking for another fountain of money.
The absolutely worst problem is that the rich and their agents at Goldman Sachs and other giant investment banks have taken over congress and the administration. Financial regulation is steadily being weakened. The latest examples are the exemptions for venture capital and private equity funds from requirements of more disclosure to financial regulators. Derivatives regulation has been weakened, so much so that it isn’t fair to say they are regulated at all.
Congress and the administration collect tens of millions of dollars from these massive concentrations of capital. It’s no wonder they don’t regulate.
That attitude infects the entire government. The SEC didn’t follow up multiple tips on Bernie Madoff. When they did interview him, they asked where he kept the securities he supposedly held. He told them they were at the Depository Trust Corporation. If the SEC had asked DTC, they would have found he had no securities. They didn’t ask. In fact:
In one e-mail message, a senior lawyer in the agency’s New York office said he thought “we should get out of the business of burning resources to chase Ponzi schemes.”
The financial sector is corrupt to the bone.
http://firedoglake.com/2009/11/01/wasted-talent-and-corruption/
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