Felix Salmon

from Barbara Kiviat:

The less you know about finance the better

Oct 25, 2010 11:52 UTC

Everywhere you turn these days, some bigwig policymaker is talking about the importance of financial literacy education. Here's Ben Bernanke doing it. And there's Tim Geithner and Arne Duncan. Even the President. It's easy to understand why we feel like we need this, what with all the bad financial decision-making of recent years. The only problem is, there's a fair amount of evidence that a lot of what we do to teach better financial habits, like courses in high school, doesn't work. Some research has shown that financial education is more likely to stick if it's focused on one topic and comes right before a person makes a related decision—learning about mortgages as you're house shopping, say, or getting a lesson in compounding interest along with your credit card.

But maybe there's a simpler approach. Maybe we should ignore real-world complexity altogether and just teach people financial rules of thumb.

A presentation at that microfinance conference last week got me going on this train of thought (although I'm by no means the first to ride it). In this experiment, researchers taught one group of small-time entrepreneurs in the Dominican Republic formal accounting, including double-entry bookkeeping, cash and working capital management and investment decision-making. Another group was taught simple rules of thumb, like "keep personal and business accounts separate" and "write everything down." The results:

People who were offered rule-of-thumb based training showed significant improvements in the way they managed their finances as a result of the training relative to the control group which was not offered training. They were more likely to keep accounting records, calculate monthly revenues and separate their books for the business and the home. Improvements along these dimensions are on the order of a 10% increase. In contrast, we did not find any significant changes for the people in the basic accounting training. It appears that in this context, the rule-of-thumb training is more likely to be implemented by the clients than the basic accounting training.

When I caught up with Greg Fischer to ask what the U.S. consumer-class take-away might be, he was appropriately modest about his findings and hesitated to draw any universal conclusions. I lack such compunction, so let me say that I think this result contains a very important piece of wisdom. People live complicated, busy lives and the learning they are most likely to put to use is that which is simple to remember and implement. In Fischer's study, some microentrepreneurs received follow-up training at their place of business: an educator stopped by to reinforce concepts and to answer questions. Once this happened, the group that received the formal accounting training applied what they had learned. But unless we want to set up a system in which your high school consumer finance teacher pops back up just in time for your first mortgage, rules of thumb might be the way to go.

And, actually, we already have many them. We just need to dig them out of the dustbin we tossed them into during the free-money euphoria. For example, don't spend more than 2 1/2 times your annual salary on a house. And don't take out more student loan debt than you expect to earn in your first year on the job (assuming you have the option). As Jack Bogle once said: "Your bond position should equal your age. I won't tell you this is the best investment advice you'll ever get, but the number of pieces of advice that are worse is infinite." It's not terribly complicated to figure out what we need to teach. We just need to jump to it.


midnightcowboy9, I disagree. I think the issue with the rules of thumb is people don’t like what they say. They WANT to believe that they have found the place where they are taking no risk and getting a high yield. They typically will not hold onto investments long after they should have been sold. etc etc. People make financial decisions like they make other decisions with their emotions.

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from Barbara Kiviat:

The real revolution in microfinance

Oct 22, 2010 13:48 UTC

People often talk (and write) about how commercialization is changing the nature of microfinance. Yet increasingly it looks like an even more fundamental shift is afoot. Microfinanciers are finally figuring out what their customers want.

The well-worn story of microfinance goes something like this. Lend a poor person in a poor country a little bit of money, and that person can invest in a business—by buying a sewing machine, say, or another cow. Over the long run, that person pulls himself out of poverty with the income generated by his endeavor.

One reason this story involves a loan is because in most countries it's a whole lot easier to lend money than it is to take deposits. (The latter requires a banking license, which the former doesn't.) But there's another reason loan-making is at the center of traditional microfinance: the people who started this work more than 30 years ago assumed that since mainstream banks didn't lend to poor people, there was a massive, untapped demand for borrowing.

The thing is, no one ever really asked poor people if business loans were the most important financial product they were missing. That's now starting to change, thanks in part to a recent wave of academic research. As it turns out, poor people lead complicated financial lives and they need money for all sorts of things.

Thursday I was at this conference, where Dean Karlan of Yale talked about research he's been doing with Jonathan Zinman of Dartmouth. In interviews with microfinance recipients in the Philippines, the pair discovered that some 46% of borrowers used a decent chunk of their business loan to pay down other debt and about 28% spent part of the money on a big household purchase—even though fewer than 4% of people in either category ever admitted this to their bank. (Disclosure: I was at this conference because I am now doing work for the Financial Access Initiative, which co-sponsored the event.)

This sort of finding—which quantifies what many practitioners have long suspected was the case—is having an impact on how microfinanciers go about their business. "We're an industry built on assumptions, and we've gotten to a point where we have to test those," said Carlos Danel, a co-founder of the Mexican microfinance behemoth Banco Compartamos. "Research is showing us that we actually don't know a lot about the customers we serve." That's why Compartamos is conducting a 4-year study with Karlan and other researchers to find out how customers use microfinance products, and how those products do—or don't—change their lives.

As Danel put it, microfinance is an industry that was born out of supply—one that came from people thinking about what organizations were capable of doing. Now, he said, the challenge is to figure out what poor people around the world actually need.


@inboulder: The story is that practitioners (not just researchers) are increasingly interested in being able to more deeply understand what services and features clients need– and then doing something about it.

Posted by BarbaraKiviat | Report as abusive

from Justin Fox:

Tim Geithner’s poor imitation of John Maynard Keynes

Oct 22, 2010 13:11 UTC

Tim Geithner has proposed to his fellow G-20 finance ministers that trade surpluses and deficits be capped at 4% of GDP. The idea is already running into criticism from countries that run big trade surpluses. German Economy Minister Rainer Brüderle warned against "planned economy thinking," according to Reuters, and  "makroökonomische Feinsteuerung und quantitative Zielsetzungen" (macro-economic fine-tuning and quantitative target-setting), according to Reuters Deutschland. "We doubt whether rigid numerical targets should be set," said Japanese Finance Minister Yoshiko Noda.

The sad irony in all this is that some other guy proposed limits on trade surpluses and deficits 66 years ago, and did it in a far more elegant and thought-through manner than Geithner has. And it was the U.S. that torpedoed the plan. To borrow from George Monbiot's lucid summary of John Maynard Keynes' proposal:

He proposed a global bank, which he called the International Clearing Union. The bank would issue its own currency - the bancor - which was exchangeable with national currencies at fixed rates of exchange. The bancor would become the unit of account between nations, which means it would be used to measure a country's trade deficit or trade surplus.

Every country would have an overdraft facility in its bancor account at the International Clearing Union, equivalent to half the average value of its trade over a five-year period. To make the system work, the members of the union would need a powerful incentive to clear their bancor accounts by the end of the year: to end up with neither a trade deficit nor a trade surplus. But what would the incentive be?

Keynes proposed that any country racking up a large trade deficit (equating to more than half of its bancor overdraft allowance) would be charged interest on its account. It would also be obliged to reduce the value of its currency and to prevent the export of capital. But - and this was the key to his system - he insisted that the nations with a trade surplus would be subject to similar pressures. Any country with a bancor credit balance that was more than half the size of its overdraft facility would be charged interest, at a rate of 10%. It would also be obliged to increase the value of its currency and to permit the export of capital. If, by the end of the year, its credit balance exceeded the total value of its permitted overdraft, the surplus would be confiscated. The nations with a surplus would have a powerful incentive to get rid of it. In doing so, they would automatically clear other nations' deficits.

Brilliant, right? Not impossible-to-enforce targets, but a system with incentives built in that would have made big trade imbalances unattractive to both sides. There's that little matter of creating a new global currency and getting everybody to accept it, but this was at the tail end of World War II. If the U.S. had decreed that the International Clearing Union was a go, the International Clearing Union would have been a go. But at the time, the U.S. ran big trade surpluses and assumed it would do so forever. Its delegates at the Bretton Woods meetings were vehemently opposed. So the idea went nowhere. Now Tim Geithner is pushing for clunky trade-surplus caps. It might be better if he just asked for a do-over.


Tim, the reason that citizen is able to hold onto that capital is not because he has guns.. there will always be organizations of people with more guns. The reason that citizen is able to maintain that capital is because of the system of laws in whatever country he calls home.

If that person wants to risk his capital in areas with no laws, he is always welcome to do so.

When you choose to spend your time in a country with a strong legal foundation, you’re going to face this issue.

Choose wisely.

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Can you ethically invest in unethical companies?

Felix Salmon
Oct 22, 2010 08:51 UTC

I first met my friend David Neubert in the context of a website he co-founded, called The Panelist, devoted to “responsible and ethical investment advice”. Dave’s moved on to other things now, but he still has opinions on the ethical-investment front. If you refuse to buy stock in unethical companies, he says, you lose diversification. Instead, Neubert looks to change the behavior of companies he’s invested in:

I exercise my ethics through shareholder activism–by supporting, or rejecting, shareholder resolutions with my vote. I like to think of this practice as socially conscious investing…

You have more power than you might think. For example, I own 2,600 shares of Valero Energy, which means my vote amounts to 1/220,000 of the company. Maybe that doesn’t sound like a lot, but compare that to my vote for president of the United States (1/130,000,000 voters); or even mayor of New York (1/4,000,000 voters).

And believe it or not, your shareholder vote may very well make a greater difference than the votes of institutional investors. Most company boards realize that individual investors tend to be more enduring in their views and a whole lot more loyal, making them more desirable shareholders than fickle institutions. If an individual voices an opinion at a shareholder meeting or writes a letter, corporations recognize that there are likely thousands of others just like them and they listen.

I don’t buy it. For one thing, using the vote as a comparison is setting the bar unbelievably low, since voting is statistically certain to make no difference at all:

Even for the most passionate partisan, it’s hard to argue that voting is a good use of your time. Instead of waiting in line to vote, you could wait in line to buy a lottery ticket, hoping to win $100 million and use it to advance your causes—and all with an almost indescribably greater chance of success than you’d have in the voting booth.

And what of Valero, a dirty oil refiner? Is it likely to listen to small shareholders like Neubert? Well, Valero has spent $4 million of its shareholders’ money in support of Proposition 23, which would void California’s 2006 Global Warming Solutions Act. Shareholders like the Unitarian Universalist Association are opposed to that spending, for good reason: the act is a good one and Valero is essentially lobbying for the right to profit from pollution, even after a law banning such activity has been passed.

Here’s how the LA Times reported the shareholder move:

The challenge was dismissed by officials at Valero, which has contributed $4 million to the Proposition 23 campaign. Like the other resolutions, the one offered to Valero’s board comes from a relatively minor shareholder: the Unitarian church…

The filers are a “stockholder activist group,” said Valero spokesman Bill Day in describing the Unitarian Universalist Assn. of Congregations…

The resolutions’ backers acknowledge that they are unlikely to have an immediate effect on campaign spending by oil companies.

The Unitarians have about $15,000 of stock in Valero; Neubert has about $46,000. Clearly, these sums are dwarfed by Valero’s donations to the Prop 23 campaign and equally clearly Valero has made its mind up that theses people are gadflies who should probably just be ignored.

The fact is that Neubert and people like him are not going to change Valero’s behavior. And the diversification benefits of owning Valero stock have never been lower, in these days of ultra-high stock market correlation.

If you consider yourself an ethical investor and you care about global warming, then it’s really hard to justify an investment in Valero, a company which is spending millions of dollars trying to repeal one of the few U.S. laws which takes global warming seriously. Certainly the diversification benefits of owning Valero stock aren’t in themselves sufficient to offset the fact that you, as a shareholder, are ultimately responsible for Valero’s expenditures on the Prop 23 campaign.

Ethical investing can and must go further than the simple obligation which all shareholders have to take their ownership stakes seriously and to vote on shareholder resolutions. It’s all well and good being conscious of the fact that your company is behaving unethically — but once you come to that conclusion, the ethical thing to do is to sell those shares. Otherwise, you bear 1/220,000 of the responsibility for precisely that unethical behavior. Dave Neubert has, in effect, spent $18 in support of Prop 23. What has he done to offset that expenditure?


@bernankesbubble, interesting point on China. Whatever the rationale, we will likely need to restart our domestic production at some point.

One problem with investing in “unethical” companies is that they face a greater risk of regulatory crackdown (and that can slam profits). I tend to be risk-averse, so I rarely take positions in such companies and am quick to sell when I do.

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from Justin Fox:

Tax incentives: Boeing 707 edition

Oct 21, 2010 19:29 UTC

I'm going to a book party at a bar in Newton, Mass. tonight (yes, life here in metropolitan Boston is unspeakably glamorous) for Sam Howe Verhovek's Jet Age: The Comet, the 707, and the Race to Shrink the World. It's a great little book—and I don't think the fact that Verhovek's brother is a friend of one my wife's best friends from high school (the reason I was invited to the book party) invalidates my positive opinion. I brought a galley along on a flight West a couple months ago and, despite being alarmed by Verhovek's accounts of exploding jet airplanes, couldn't stop reading. I had finished it by the time I landed in Reno.

The reason I'm bringing all this up (other than to impress you with the facts that I know Sam Howe Verhovek's brother and have been to the Biggest Little City in the World), is because there's a really fascinating tale in the book involving tax incentives. During the Korean War, Congress enacted an excess profits tax meant to keep military contractors from, well, profiteering. In its infinite wisdom, Congress defined excess profits as anything above what a company had been making during the peacetime years 1946-1949.

Boeing was mostly a military contractor in those days (Lockheed and Douglas dominated the passenger-plane business), and had made hardly any money at all from 1946 to 1949. So pretty much any profits it earned during the Korean conflict were by definition excess, and its effective tax rate in 1951 was going to be 82%. This was unfair and anti-business. If similar legislation were enacted today, you could expect U.S. Chamber of Commerce members to march on Washington and overturn cars on the streets.

It being 1951, Boeing instead sucked it up and let the tax incentives inadvertently devised by Congress steer it toward a bold and fateful decision. CEO Bill Allen decided, and was able to persuade Boeing's board, to plow all those profits and more into developing what became the 707, a company-defining and world-changing innovation. Writes Verhovek:

Yes, it was a huge gamble, but for every dollar of the dice roll, only eighteen cents of it would have been Boeing's to keep anyway. For Douglas and Lockheed, both in a much lower tax bracket, that was not so easy a call.

So that's it! High tax rates—confiscatory tax rates—spur innovation! Well, at least once in a blue moon they do. Which is an indication that there might be some important stuff missing from the classic economists' view of taxation, as summed up by Greg Mankiw a few weeks ago:

Economists understand that, absent externalities, the undistorted situation reflects an optimal allocation of resources. It is crucial to know how far we are from that optimum.  To be somewhat nerdy about it, the deadweight loss of a tax rises with the square of the tax rate.

Somehow I don't think that formula held true in Boeing's case.


I don’t think this is the whole story.

Boeing knew that the war/legislation would end some day, so they took the gamble. If high taxation was permanent, they would have no incentive to do so.

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When stocks become manipulable

Felix Salmon
Oct 21, 2010 09:53 UTC

Have you ever wondered how big a stock needs to be before it can be efficiently arbitraged? The Fundometry blog has done an investigation along those lines and the answer would seem to be somewhere around $400 million in market cap.

Here’s the chart:


What you’re looking at here is four different ETFs, split into quintiles according to the size of their components. So the bar on the far left is the smallest 20% of stocks in the IWC microcap ETF, while the bar on the far right is the largest 20% of stocks in the S&P 500.

The y-axis, meanwhile, measures correlation: the degree to which each of the stocks in that quintile is correlated with the index as a whole.

Clearly correlation is very high these days across the market and in general stocks seem to have roughly a 70% correlation with their index. But the smallest stocks — the bottom quintile of the small caps and most of the microcaps — have lower correlation, probably because they’re so small and illiquid that it’s hard to arbitrage them against their respective index.

Microcap stocks, in this chart, are stocks with a capitalization between $50 million and $500 million, while small caps are capitalized between $300 million and $1 billion. So judging by the chart alone, I’m thinking that about $400 million is the point at which you can expect your stock to be arbitraged as a matter of course against its index.

This issue is related to Harold Bradley’s theories about manipulation of the relationship between microcap stocks and obscure ETFs: below about $400 million or so in market cap, it seems there’s a certain amount of inefficiency in the market and therefore room, in theory, for stocks to be manipulated. (Yes, there might be fundamental reasons why very small stocks have lower correlations than their larger brethren, but even so, the fact remains that these stocks are hard enough to trade that manipulation can be profitable.)

Are these findings, then, grist for Bradley’s mill? Do they demonstrate that ETFs shouldn’t include microcap stocks? No. A lot more work needs to be done on that front. But at least now we have an idea of where the manipulation is likely to be taking place, if it’s happening at all.

from Barbara Kiviat:

Why do people care so much about the minimum wage?

Oct 20, 2010 20:40 UTC

Over at my old Time.com stomping grounds, Adam Cohen has written a fascinating article about the movement to have the federal minimum wage declared unconstitutional. This goes hand-in-hand with the emergence of the minimum wage as a campaign issue in the midterm elections. My question: Why do people care so much?

For much of its recent history, the federal minimum wage hasn't even been all that binding. State minimum-wage laws have led to higher pay, or companies paid more on their own. According to the Labor Department, only 980,000 people made the federal minimum wage last year. Even when you add in the 2.6 million workers who made less (people like tip-collecting waitresses and teenagers just working for the summer), you still only wind up with 4.9 percent of all hourly-paid employees-- and just 2.9% of the total U.S. wage-earning workforce.

Yes, it's true, in Econ 101 we all learn that price floors disrupt the most efficient allocation of resources in a marketplace. When it comes to low-wage workers, that leads to companies hiring fewer people than they would otherwise, leaving some folks who want jobs without them.

But those who make it beyond one semester of economics find out that the world doesn't always work the way a rudimentary model would predict. In fact, in recent years economists have struggled to find explanations for real-world situations in which higher wages do not, in fact, lead to lower employment. One theory: a higher wage forces employers to invest in their employees and figure out ways to make them more efficient (i.e., valuable). As Richard Florida likes to argue, boosting efficiency in low-wage (mostly service sector) jobs is exactly what we should be doing right now.

But I digress. Back to my original question: Why do people care so much about an economic policy that doesn't seem to have much of an impact on the economy? One reason might be because of the anchoring effect of the minimum wage. Even if only a few people are earning the minimum wage, its existence still sends a signal to the market that this is about what it should cost to hire an unskilled worker. That tinkers with the expectations of both companies and workers. Or, what I might be quicker to believe: talking about the minimum wage—whether you want to increase it or abolish it—is a proxy for saying "I care about struggling workers," or "I don't want government telling business what to do."

The problem with using the minimum wage to have this debate, though, is that no matter who wins, the victory will be hollow. If we want to help low-income families, we could do a lot more than change a wage many of them don't make anyway. And if we want to minimize government intervention in free enterprise, we might choose a battle that is meaningful to companies outside of such a narrow range—half of all minimum-wage workers have jobs in the leisure and hospitality industries.

Although maybe saying that just goes to show how naive I am about politics. Maybe in that realm the best battles to fight are the ones that are the least likely to change the status quo no matter what the outcome is.


AdamJ, I’m aware the payment method I put forward isn’t appropriate for every job. Ideally, the people in charge would know not to institute it for subjective work and employees would know not to take such a job.

I was thinking more of factory or other production type work where both quantity and quality are easily measurable. Certain service jobs could also fall under this scheme.

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BofA’s legal predicament

Felix Salmon
Oct 20, 2010 12:18 UTC

Nelson Schwartz links the big lawsuit against BofA/Countrywide directly to the mortgage bond scandal I’ve been banging on about:

The legal battle turns on the question of whether the banks properly represented the loans they put together into mortgage-backed securities when they sold them to investors. If the banks ignored evidence that the underlying mortgages did not conform to underwriting standards or they lacked the proper paperwork, the banks could be obligated to buy the troubled mortgages back.

Schwartz also reports that this legal trade is attractive enough that vultures are circling:

Hedge funds like York Capital and Moore Capital have been jumping into the game recently, buying up bad debt in the hopes it will eventually be bought back…

“Any hedge fund with a distressed desk is contemplating this trade,” said one analyst.

There’s a whole bunch of different things going on here, but the key development is that bondholders have managed to get organized, and they’re taking the battle not only to otiose trustees, but also to loan servicers.

The key number here comes right at the top of the letter sent to BofA/Countrywide:

The undersigned are the Holders of not less than 25% of the Voting Rights in Certificates issued by the Trusts listed on the enclosed Exhibit A.

Once that 25% level is reached, bondholders have all manner of rights, which are now being put to good use. For one thing, they’re allowed to file exactly this letter: a notice of nonperformance, telling the servicer in pretty strong language to buck up and start doing its job, or face a massive legal action.

Isaac Gradman says there might be a problem here:

These efforts may well fail for an additional reason that was cited as a basis for Bank of New York’s refusal to comply with Patrick’s earlier request – the failure to provide evidence of a specific breach.

But I’ve also heard that the 25% number is crucial on this front, too. If you own 25% of a securitized issue, I’m told, you can force the custodian to hand over the underlying, individual loan documents — exactly the same documents that Clayton and other due diligence companies examined before the bonds were issued. At that point, it becomes a lot easier to find specific breaches and to make BofA’s life a legal nightmare.

The position of BofA here is hilariously complex and conflicted. BofA owns 34% of BlackRock, which is a lead plaintiff in this case. (BlackRock manages the mortgage bonds which the Federal Reserve inherited as part of the Bear Stearns bailout.) BlackRock, in turn, is suing Countrywide (owned by BofA), the loan servicer which has clearly not been doing its job:

Although there are tens of thousands of loans in the RMBS pools that secure the Certificates, the Trustee has advised the Holders that the Master Servicer has never notified it of the discovery of even one mortgage that violated applicable representations and warranties at the time it was purchased by the Trusts.

In other words, Countrywide has an obligation to tell the bond trustee whenever a loan turns out to be in violation of the bond’s representations and warranties. But Countrywide has never done that. Why? The answer is obvious: the minute that it did so, the trustee would force the servicer to put the loan in question back to the originator. And the originator is — you guessed it. Countrywide.

Essentially, BofA is suing BofA so that BofA can be forced to put bad mortgage loans back to BofA.

Yves Smith reckons that the winner here is likely to be BofA — that the lawsuits (which, remember, haven’t even been filed yet, and won’t be for at least 60 days) will probably be settled for a relatively modest sum. But I’m less sanguine.

For one thing, Smith says that the plaintiffs will only be able to collect on loans which have gone bad and where they can show damages. But the bondholders might want to force BofA to buy back even performing loans, if they got thrown into the pool without conforming to the relevant standards. Calculating BofA’s loss on such things won’t be easy: after all, if those loans continue to perform, then BofA would ultimately make a profit on them. But given the ongoing foreclosuregate mess, there’s a very real chance that even performing loans will end up in strategic default.

The big picture I think is that a lot of the risk embedded in mortgage bonds could shift from bondholders back to the investment banks which underwrote them. In a just world, the bond trustees would be leading this charge, but they’re not, so the cause has been taken up by the bondholders themselves, who are only now beginning to organize and to become familiar with all the legal avenues that the various players can explore.

It’s entirely possible, of course, that obstructionist lawyers for BofA and the trustees will manage to block these suits and keep all those toxic bonds in the hands of bondholders. But mortgage-bond owners are becoming increasingly aggressive and activist, and they’re comparing notes with bond insurers who are also in a very similar situation. The investment banks, BofA foremost among them, might win. But the fight is going to be long and hard and expensive, and is going to make them look very bad indeed. They might well find it more attractive, all things considered, to negotiate a settlement, write a ten-figure check, and move on.


BOA’s questionable business ethics go back for at least several years, when they began issuing credit cards to people in this country illegally as a way to tap into new markets. As a NC native, it’s sad to see a once reputable regional business fall into the Wall Street mentality that making money at any cost is okay. It’s largely up to individuals to walk away from such businesses since we can no longer rely on Washington to protect us. Boycotts were common in the 70′s and need to be used again today.

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from Justin Fox:

Some people really need organizations. Like Marty Peretz, for example

Oct 19, 2010 21:33 UTC

The Boston Globe has a Local-Boy-Made-Controversial story about Marty Peretz (it was in yesterday's paper, but I just got around to reading it today). There's nothing much new in it, but it got me thinking about the changing division of labor in journalism and how it hasn't worked out equally well for everybody.

Peretz is in trouble for making some sweeping and denigratory generalizations about Muslims in his blog, and then not-quite-apologizing for it. I would imagine that Peretz has held similar opinions for decades. But he's only started getting himself into big trouble for them in the past four years: that is, since he launched his blog, The Spine. Until then, Peretz was mostly judged in the context of the institution that he bought in 1974 and has been editor-in-chief of ever since (even while selling his majority stake in 2000 and then repurchasing it in 2009), The New Republic. In that context, he came off pretty well. As Eric Alterman wrote a few  years ago in an otherwise critical account of the Peretz era at TNR:

I think any honest reader would be forced to admit that for many if not most of these years, The New Republic was, despite everything, a truly terrific little magazine.

The main reason: Peretz knew how to hire, and keep, talented people. Here's Alterman again:

"Try, try very hard not to hire anybody who isn't smarter than you, and wiser," Peretz says he promised himself. In this, he notes, he succeeded. He might have added "and more liberal." For in the days when the neoliberal Kinsley and old-fashioned social democrat Hertzberg traded off the magazine's editorship, literary and political giants did indeed walk the TNR hallways. Just 28 and still in law school when he initially took over the magazine, Kinsley's contrarian nature and inimitable example would prod not only The New Republic but an entire generation of pundits in the direction of Mickey Kaus/Jacob Weisberg–style smart-ass neoliberalism.

So as the head of an institution, Peretz was (at least until recently) undeniably successful—even if, like Alterman, you didn't like the direction in which he pushed that institution. As a writer and thinker, though, he was always something of a dud. I was an enthusiastic reader of TNR in the 1980s and early 1990s, but I learned to skip the magazine's "Diarist" page whenever Peretz wrote it. In a magazine characterized by intellectual sparkle and surprise, Peretz's dispatches, mostly devoted to Middle Eastern affairs, were leaden and predictable. But so what? They were just a few pages a year in an otherwise great magazine. And look at all the brilliant people Peretz hired!

Since 2006, though, Peretz has had a blog. This allows him to share his opinions as often as he wants, without the intervention of smarter, wiser TNR editors who in past years might have protected him from his most intemperate and infelicitous phrasings. It also allows him to reach readers who probably aren't interested in the rest of TNR's content. That is, Peretz has to a certain extent been allowed to break free from his organization. Similar new freedoms have been granted in recent years to lots of journalists, myself included, and many of us have found it wonderfully liberating. Heck, Peretz probably finds it liberating too. But it's done permanent damage to his reputation. For 90% of the people who've ever heard of him, he's now that anti-Muslim fanatic, not the guy who hired Hertzberg and Kinsley and did what he could to promote the career of the young Al Gore. He was far better off and more valuable as part of an organization—an organization that he happened to own—than as a mostly independent pundit.

Why do I go on and on about this? Not to defend Marty Peretz, but to observe that institutions have been getting short shrift lately, especially in the world of journalism. And for sure, a lot of existing journalistic institutions are deserving of no shrift at all. But the idea of journalistic organizations in which people specialize, in which editors keep writers from making fools of themselves, in which cranks have a place as long as they're good at something, isn't entirely archaic. We're not all cut out to be freestanding journalistic brands.

Update: Jack Shafer e-mails to point out that Marty Peretz was writing loopy stuff, and occasionally getting called a racist, back in the 1980s and early 1990s too. But he has  definitely taken it up a notch or three since he started blogging, and he never got into the amount of trouble then that he finds himself in now. Also, I failed to mention my favorite Peretz controversy of the past year, when he approvingly quoted from a Tunku Varadarajan Daily Beast column that compared John McCain to Liza Minnelli in a way that reflected poorly on both, then issued a bizarre apology the next day for "slighting ... her and her gifts."


Not to lower the tone of the article, but I read someone make a similar point about the films of George Lucas. Fantastic in collaboration with other directors, but when given carte blanche demonstrated a troubling lack of self control.

It’s not to say that there aren’t great individual thinkers, since there are obviously people who thrive in a freeform space. But some people could use a healthy amount of external editing.

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