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Inside Job

I watched the movie with this title on a blu-ray tonight. A fascinating tele-documentary on the GFC.  Some of the prominent macroeconomists* that I had learnt to respect reveal themselves to be utter s***s who would say or do anything for a moderately large cash pay-out.   A word from the wise guy: There is more to life than selling out to the highest bidder you discredited louses.  Of course these economists only got the scraps from the table – obviously the big payoffs went to those stealing, lying to the public and corrupting the public policy process who mainly came from the large finance firms.  The finance executives continue to enjoy high political status and of course retain their ill-gotten wealth. An excellent film that proved a good history of the events leading up to the GFC, the scandals that developed once it occurred and the ongoing scandals involving Obama.  Capitalism is creating bad values that undermine itself.

I am interested in ethics. This film does not only show poor ethical positions that stem from inadequate economics methodology.  It also illustrates straightforward corruption and dishonesty. The economists exposed here should be shamed, sacked from any involvement in public life and certainly should not be allowed to inflict their evil nature on students in universities.   The mainly corrupt finance executives should, of course, be in jail.

*I have been discussing, in class, over the past week the Larry Summers memorandum on trading pollution with developing countries in order to deliver “gains-from-trade”.  I have tried to take what is a morally preposterous argument seriously but I won’t any more.  Summers has bad values and poor judgment. He deserves explicit condemnation and should enjoy zero academic tolerance.    Ditto Mischkin, Bernanke….

10 comments to Inside Job

  • wjr

    And Summers seems to be the favourite of the Obama administration for taking control of the Fed if and when Bernanke steps down in January!
    Who was the Fed chairman in the 30’s who was said to have saved Capitalism from itself? Summers is more likely to be remembered as the chairman
    who abetted the suicide of Capitalism by its own corruption.

  • davidp

    Hi Harry,

    Would like to discuss the statement “Capitalism is creating bad values that undermine itself.” Would rather argue that these are values that are present in all systems at all times. The behaviour described above suggests either:

    1. Some people are willing to make statements inconsistent with their beliefs in return for sufficient compensation – but this happens in all systems.

    2. People who want financial rewards are willing to seek out and pay people who genuinely believe what they say (Ayn Rand probably believed most of what she wrote…) and who are happy to say it. (this is a bit of an occupational hazard for people doing abstract modelling who continually have to assume away things to get things done) This is also not unique to capitalism.

    Furthermore, it is arguable that in many ways the moral state of capitalism has improved over time (no one is arguing for the return of child labour or slavery and though worker safety is still contested – it is much better than a hundred years ago). The undermining is a bit strong as although the GFC was bad for everyone affected, in the long run (for developed countries) it is just a blip in an enormous period of growth.

    That being said – am also angry about the way financial executives got away with it (another local non-economic example of this is how John Laws and Alan Jones got away with cash for comment…)

    Was society in the past better at shaming people (or was it mainly poor and middle class people who got shamed…)?

  • davidp

    P.S. If the first case above, it is an example against the argument that ethical values trump crude economic self interest (at least for some people). My guess is high-flyers in any profession (like professional athletes) are more prone to this… (it contributing in some part to their becoming high flyers…)

  • hc

    I was a bit careless in phrasing David but don’t think I got it wrong. Capitalism needs greed and self-interest to function. These seem, however, in the cases of those mentioned, to have come to dominate the other values that Adam Smith and others claimed capitalism needed – a sense of justice and fairness, altruism and most of all temperance – getting the ethical balance right.

    I think professionals have a moral obligation to be truthful and to declare conflicts of interest that stem from monetary payment. Your second claim is that experts are self-selected with certain ideological or other views. Maybe. But taking millions of dollars for promoting views that your sponsor seeks to have advanced seems to blur the line between acting as a hired-gun and merely being asked to express your views.

  • davidp

    I guess my prior is that greed and self interest exist in all systems – capitalist, feudal or socialist as people can get financial and other rewards in all systems. It isn’t hard to find examples of this behavior under all systems. It is an open question whether greed and self interest work in a worse way in a capitalist system than in other systems (one could argue competition provides a check on this behavior that doesn’t exist (or work as directly) in a non-market system e.g. there are far less restraints on the greed and self-interest of a feudal monarch). A secondary point is that highflyers in any of these systems will probably be a bit more greedier and self-interested than the typical person.

    I agree absolutely with professionals having a moral obligation and that conflicts of interest should be declared. Would rephrase my second claim is that it could be the case (this is probably the best possible interpretation of it) that there is self selection. I certainly think there are people who blur the lines in return for money. It could be (likely to be?) the case that even in the cases were there is some initial self selection that it turns into effectively being a hired gun. So my point may not be empirically important even if there is some truth to it

  • hc

    David, There is a long train of thinking (it goes back to Vico) that suggests capitalism has “civilising” impacts – people are less likely to be selfish if they can do cooperative deals that make them better off. Its a comforting view but individuals can exploit this situation where trust develops. The finance company executives who sold products they knew would fail and who cheated millions out of their life savings for the most part were presenting themselves as respectable businesspeople offering a mutually beneficial deal. Maybe there are cycles and as trust builds up these cretins (like scum on the surface of a Werribee pond) go into action. People become aware of the deception and things because less corrupt for a while until the next Ponzi opportunity arises.

  • davidp

    It is interesting to hear about this literature – to some extent it is related to the North (I think) argument about capitalism requiring secure property rights to flourish – this form of cooperation (respecting each others property rights, en- or rein-forced by institutions) can take place easier under capitalism than feudalism or socialism.

    Is Deidre McCloskey’s most recent work in this line (or something different) – I haven’t read it but second hand accounts sound similar.

    The cycle argument is sort of like (what I remember is) a Minsky type description of business cycles though there is probably a more formal and worked out version of this somewhere. I am not sure if there is a deterministic cycle going on or more that swindlers flourish in certain situations (like when the pace of innovation (or structural change) is rapid so it is harder for outsiders to assess what is real and what isn’t)

  • Jim Rose

    whatever happened to unintended consequences?

    Moral hazard, adverse selection, costly state verification, a Fed Funds rate of 1% and a long deviation from the Taylor rule are much harder to put on the big screen than ’round up the usual suspects – republicans all’.

    Many of the key issues raised are discussed at http://www.minneapolisfed.org/publications_papers /pub_display.cfm?id=4526 Interview with Thomas Sargent where he says that:

    1. It is just wrong to say that this financial crisis caught modern macroeconomists by surprise: Allen and Gale’s 2007 book Understanding Financial Crises collects many of the dynamic models of the causes of financial crises and government policies that can arrest them or ignite them.

    2. Stern and Feldman’s Too Big to Fail doesn’t have an equation in it, but wisely uses insights gleaned from the formal literature to frame warnings in 2004 about the time bomb for a financial crisis set by regulations and government promises.

    3. Two polar models of bank crises and what government lender-of-last-resort and deposit insurance do to arrest them or promote them. In the Diamond-Dybvig and Bryant model, deposit insurance is purely a good thing, while in the Kareken and Wallace model, it is purely bad.

    4. Bryant-Diamond-Dybvig model has been very influential generally, and in particular that it was very influential in 2008 among policymakers. Many policy authorities correctly noticed that a Bryant-Diamond-Dybvig bank is not just something that has “B A N K” written on its front door. It’s any institution that executes liquidity transformation and maturity transformation.

    5. Policy makers saw Bryant-Diamond-Dybvig bank runs all over the place. The logic of the Bryant-Diamond-Dybvig model persuaded them that if they could arrest runs by convincing creditors that their loans to these “banks” were insured, that could be done at little or no eventual cost to the taxpayers.

    6. The Kareken and Wallace model’s prediction is that if a government sets up deposit insurance and doesn’t regulate bank portfolios to prevent them from taking too much risk, the government is setting the stage for a financial crisis.

    7. The Kareken-Wallace model makes you very cautious about lender-of-last-resort facilities and very sensitive to the risk-taking activities of banks.

    8. The Diamond-Dybvig and Bryant model makes you very sensitive to runs and very optimistic about the ability of insurance to cure them.

  • Uncle Milton

    This was a great documentary and should be compulsory viewing for every first year economics student. It was certainly fascinating to watch these stars of the profession picked apart and in some cases condemn themselves out of their own mouths. The combination of avarice, cynicism, opportunism, arrogance, ideology, and in one case naivety was not attractive at all.

  • davidp

    Both the AER and Economic Inquiry (and possibly others) now require disclosure statements upon submitting papers.

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