Opinion

Felix Salmon

Why it makes sense for Larry Page to donate his billions to Elon Musk

Felix Salmon
Mar 25, 2014 17:50 UTC

Three years ago, with a post entitled “philanthropy isn’t for profit”, I expressed the hope that we had finally reached a turning point, and that people would “do good to do good, rather than simply declaring that the best way they can do good is to chase profit as zealously as possible”. And maybe I was right. That post was directed in part at Matthew Bishop, who had written a silly article asking whether IBM had done more good for the world than the Carnegie philanthropies. But this evening, when I ran into Bishop at an event for rich people in a swanky midtown club, he couldn’t bring himself to defend Larry Page, who said something similar at TED:

Rose asked him about a sentiment that Page had apparently voiced before that rather than leave his fortune to a cause, that he might just give it to Elon Musk. Page agreed, calling Musk’s aspiration to send humans to Mars “to back up humanity” a worthy goal. “That’s a company, and that’s philanthropical,” he said.

Page’s comments have already been attacked by Kevin Roose, and, as I say, they’re not going to be defended by Matthew Bishop. But here’s the weird thing: Page’s ideas aren’t nearly as dumb as they might seem at first blush. In fact, even I can defend them — and I’m the kind of person who generally hates the way that rich people give away their money.

Page, with his unorthodox idea, deftly sidesteps most of the mistakes that rich people make with their charitable donations. Most importantly, there’s nothing self-serving about Larry Page giving his money to Elon Musk: there isn’t any ego boost involved, and there isn’t even a tax deduction. Instead, Page is simply trying to work out how his money is most likely to have a positive transformational effect on the world.

The fact is that private philanthropy almost never has such an effect: big-picture changes to the world come from commerce and from government, not from gifting. Exxon Mobil has changed the world; Phillip Morris has changed the world. Apple and Microsoft and Cisco and Intel have changed the world. Monsanto and Cargill and ADM have changed the world; Pfizer and Roche and Novartis have changed the world. Certainly Great Britain and France and Russia and China and the US of A have changed the world, many times each.

And, as Page knows better than anyone, Google has changed the world.

Page is convinced (I agree with him on this, but I’m not going to argue the point here) that Google has been a positive force in the world. Indeed, it has been a more positive force than at least 99% of philanthropies. A philanthropist with $100,000 in 1998 who wanted to make the world a better place could hardly have done better than Andy Bechtolsheim, the first funder of Google — even if you ignore any good that Bechtolsheim might end up doing with the billions that investment ultimately became.

Of course, it’s impossible ex ante to know which startup is going to be the next Google. But Page is someone who has already changed the world once; he knows that there’s a 99% probability that his philanthropic activity will end up being orders of magnitude less effective and less important than his tenure at Google. It’s important to put philanthropy in perspective: for all that very rich people are indeed very rich, they generally aren’t rich enough to really move the needle on a societal level. Page is worth about $30 billion; the budget for the New York City department of education is almost that much per year. Famously, Bill Clinton has said that he will never be able to achieve, over the entire lifetime of his charitable foundation, the same effect that he could have with a two-second stroke of the pen while he was president. Or, to take a slightly more controversial example, look at the amounts of money pledged in the wake of natural disasters like the Haiti earthquake or Hurricane Sandy. The public is invariably extremely generous when such things happen — but government money always dwarfs private contributions.

Page is also smart enough, and hangs out with enough very rich people, to know that philanthropy is hard — and that there’s absolutely no reason to believe that the luck and skill he has demonstrated founding and running Google would read across to similar philanthropic success. There is exactly one technology billionaire who has put an enormous amount of personal time, effort, and money into running his personal philanthropy; not everybody can be Bill Gates, and it’s unfair to expect that other billionaires should be Bill Gates.

In other words, Page probably lacks both the ability and the inclination to create some world-changing philanthropy on his own — as we can see by the way in which Google.org and the Google Foundation have had relatively little impact. Let’s assume that he’s self-aware enough to know that. And now, in that light, let’s revisit the “idealistic vision” of his TED interview:

It’s a vision that includes everything from widespread artificial intelligence to self-driving cars to high-altitude balloons that bring internet access to the far reaches of the world…

Rose also asked him about his fascination with transportation systems, which Page said started while waiting in the snow for the bus at his alma mater, the University of Michigan. That fixation has led to Google’s self-driving cars project, which Page hopes will someday transform the world’s cities…

Page had words that sounded harsh even in his soft voice for businesses that lacked the same lofty goals of an Elon Musk or a Google. “Most people think companies are basically evil. They get a bad rap. And I think that’s somewhat correct,” Page said. “Companies are doing the same incremental thing that they did 50 years ago, 20 years ago. That’s not really what we need. Especially in technology, we need revolutionary change, not incremental change.”

That may be an easy thing to say when your company’s stock is trading near $1,200 per share and your main business of selling ads makes tens of billions a year. But Page certainly seems like someone for whom those ads are only a means to an end, and that end is not making himself rich. Page wants to build the future that we all may very well end up living in.

The point here is that Page’s ambitions are vast: they require vision and also the kind of resources which can be marshaled only by massive corporations, rather than any individual. And the question then arises: what can Page do with his personal wealth which could play on the same playing field as the ambitions he has at a corporate level?

The answer, surely, is help create another Google — another company which can change the world for the better. And if you look around for someone capable of pulling off such a feat, Elon Musk is always going to be at the top of the list.

Does that mean, pace Roose, that Page considers buying stock in Microsoft to be a credible alternative to giving money to the Gates Foundation? Of course it doesn’t. For one thing, the chances of Microsoft transforming the world again are pretty low. And for another, who said anything about buying stock?

If your philanthropic intent is to help Elon Musk change the world, there are lots of things you can do which are better than simply going out into the market and buying stock in Tesla. That stock has already been issued; the money Musk raised by selling that stock is already in Tesla’s coffers. If you buy the stock from some hedge fund, all you’re doing is transferring money to a hedge fund, you’re not particularly helping Elon Musk.

On the other hand, the glory of corporate capital structures is that they allow your money to be leveraged many times, in a way which is very difficult in traditional philanthropic contexts. (Indeed, if you give money to a foundation and then the foundation gives away just 5% of its capital every year, then you effectively have substantial negative leverage on your donation.)

So let’s say that Elon Musk issued a new class of stock. In the UK, such things are often called a golden share. Such stock would have voting rights and possibly quite substantial voting rights at that; it might even come with one or more board seats. But it would represent a negligible economic interest in the company: it would have no right to dividends, for instance. (For an example of how such a structure might work in the event of an acquisition, take a look at how the Reuters Founders golden share still has an important role to play within Thomson Reuters.)

The money used to buy the golden share would go straight onto the asset side of the corporate balance sheet, where it could support the issuance of more equity and more debt: it would punch well above its weight. It could help Musk’s company to grow faster, to be more ambitious, to be less beholden to common shareholders and/or bondholders. It might not, ultimately, make any difference at all — but, on the other hand, if the sum of money involved were in the multiple billions of dollars, it might make a very large difference indeed. In short, Page would have ended up buying the possibility of changing the world — again.

At that point, Page just needs to start comparing probabilities. What is the probability that he would change the world through traditional philanthropy? What is the probability that he would change the world if he bought a golden share from Elon Musk? If the latter is greater than the former, that’s a pretty strong reason to choose Musk over some tax-exempt foundation.

One of the big problems with contemporary philanthropy is that it’s obsessed with results: everybody wants to ensure that their money is making a real difference. In the case of unconditional cash transfers, for instance, which are pretty trendy these days, you know with certainty that after you give $1,000 to a poor person, that person is $1,000 richer. It’s a clear and unambiguous outcome, and there’s a lot of evidence to suggest that making poor families richer does wonders for their quality of life.

From the point of view of someone like Larry Page, however, it’s easy to see how the idea of simply giving his money directly to the poor might not appeal. The short-term effects would be wonderful, but also limited; the long-term effects would be relatively slim and hard to discern. Certainly the outcome would be minuscule compared to the long-term effects of, say, the invention of the printing press.

Which means that if you’re a person with Page’s ambitions and Page’s wealth, the trick is to take risks, rather than try to engineer a certain outcome. Better a small chance of creating a permanent and positive change to the way the world works, than a much larger chance of making a much more limited intervention. It’s a reasonable stance to take.

COMMENT

FingersFly… “Do you want to help disabled students, or the gifted ones?” good question. Will the gifted ones do things to help disabled students? That’s really what this discussion is about isn’t it?

Elon Musk is one of the gifted ones. He wants to help the world through sustainable energy and has the pieces to make a huge shift in humankind in that and by taking us to a new world. But he might not have the money (he’s trying to make SpaceX profit fund the settlement of Mars).

Of interest, he also recognises that humanity moves in stages, it doesn’t always go forwards, and there’s a real possibility that we could lose our ability to colonise Mars in 100 years if we don’t do it soon. Unlikely – but environmental catastrophes or war etc could hit us hard. A Mars city will be a potential protected pocket of civilisation that can do things we won’t be able to do on Earth, and ultimately bring much good to Earth.

Posted by GregAlex | Report as abusive

It’s time for Bill Gross to retire

Felix Salmon
Feb 25, 2014 07:24 UTC

A word of entirely unnecessary advice for anybody on the Pimco trading floor Tuesday morning: do not look Bill Gross in the eye. Or talk. Or do anything at all to make yourself stand out or be noticed. Because Gross, who for most of his career has been the subject of some of the most glowing press imaginable, has just been brought down by a downright brutal article on the front page of the WSJ. Neither Gross nor Pimco will ever be seen the same way again, and indeed, if Gross cares at all about the long-term fortunes of the company he built, the best thing he can do right now is simply retire.

The story is illustrated, online at least, with a gruesome photograph of the 69-year-old money manager, looking sideways through yellowing eyes as he reaches out like something from a zombie movie. And it just gets worse from there, confirming all the worst fears of anybody with investments at the monster-sized firm.

Late last year, in front of a number of traders, Mr. Gross said, “if only Mohamed would let me, I could run all the $2 trillion myself…I’m Secretariat,” referring to the famed thoroughbred. “Why would you bet on anyone other than Secretariat?”

That’s just about the worst possible thing for Gross to be quoted saying, given who Pimco’s clients are, and what they want, and what former CEO Mohamed El-Erian has been telling them, consistently, since he re-joined the company in 2007.

Pimco’s clients are, overwhelmingly, fixed-income investors. That means they’re conservative: while they like outperformance, they’re not shooting for the stars, and they hate taking unnecessary risks. Like, for instance, the risk that they’ve placed their billions in the hands of a cantankerous old man who always thinks that he’s right and that everybody else is wrong.

“I have a 41-year track record of investing excellence,” Mr. Gross told Mr. El-Erian, according to the two witnesses. “What do you have?” …

When Mr. Gross establishes an investment thesis, he usually doesn’t appreciate dissenting views, employees and former Pimco traders say. Once, when a senior investment manager said a bond in Mr. Gross’s fund appeared to be expensive, Mr. Gross responded: “OK, buy me more of it,” according to a Pimco executive. The purchase was made…

Mr. Gross said in a recent interview that he would be stepping back from some investment duties, but others at the firm are skeptical he will give up any control.

“I’m ready to go for another 40 years!” Mr. Gross posted on Twitter after Mr. El-Erian’s departure.

Pimco’s investors are also overwhelmingly institutions. Pimco itself gets mandates not because it has the best performance, but more because it’s the ultra-safe choice: it can pass any conceivable due diligence test, it has been around for decades, and it has multiple layers of checks and balances. El-Erian knew exactly what his job was, in public and in private: to paint Pimco as a disciplined supertanker of an investment vehicle, with committees and open dissent and a well-tested procedure for arriving at investment decisions, which was much more robust and much more trustworthy than any individual could ever be. In other words, to move Pimco (or at least the 90% of Pimco which isn’t Gross’s Total Return Fund) as far as possible from idiosyncratic Bill Gross risk as possible. Gross is old, he’s erratic, and he’s generally not someone you want to park your money with on the quasi-permanent time horizon which is used by Pimco clients like sovereign wealth funds and foundations.

Today, with the publication of this article, every fear of every large Pimco investor is going to be rearing its ugly head. Now that El-Erian has left, are Pimco’s trillions effectively under the sole charge of a monomaniac? Indeed, it seems that Gross has become so impossible to work with that El-Erian — the man who repeatedly said that he loved his job, the man who even according to this article “flourished in the firm’s demanding environment”, the man who was the explicit heir apparent to Gross — ended up resigning rather than work for Gross one more day.

“I’m tired of cleaning up your shit,” El-Erian said to Gross, last June, in front of more than a dozen colleagues. El-Erian is soft-spoken to a fault; if Gross had pushed him that far, it’s little surprise he quit.

Note too the byline on the article: it’s by Gregory Zuckerman, a man who has made a career out of writing awestruck books about the investing prowess of billionaires not unlike Gross. The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History, published in 2009, was followed up by The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters. Zuckerman’s stock in trade is not character assassination; quite the opposite. And yet he has penned what could — what should — be a fatal blow to the career of the greatest bond investor of all time.

There is no way for Gross to recover from this article. He knows it, too. When El-Erian first told Gross that he wanted to quit, Gross offered him “more power”, according to Zuckerman; indeed, El-Erian was offered “whatever he wanted to entice him to stay”. None of it was enough. El-Erian has said basically nothing in public since he quit, but the message here speaks loudly all the same: his job as CEO was to manage Pimco’s risks, and he felt simply incapable of managing the biggest risk of all.

Sometimes, the CEO isn’t really the CEO. When El-Erian was at Harvard, he “was having a heart attack” thanks to the irrational demands of Larry Summers, and ended up quitting to go somewhere a bit more grown-up. I can see how he would have had no desire to replay that movie a second time. And if El-Erian can’t manage Gross, then no one can manage Gross.

As a result, the only way to save Pimco is for Gross to leave the firm entirely. If he must, he can take his Total Return Fund with him. Pimco’s investors care about good governance ahead of anything else, and Pimco is clearly suffering under the very opposite of good governance right now. Gross is singlehandedly responsible for most of what Pimco is today, and he can leave, at this point, with his head held high. But his natural tenure at Pimco has come to an end. It’s time for Bill Gross to take his leave of the company he built, and for him to watch it thrive under more professional, less idiosyncratic, management.

Update: Matthew Klein responds with an argument which would be very strong, were Gross a stock investor rather than a bond investor:

Every investor has a choice between allocating their money to active money managers who bet on the markets, such as Gross, and handing over their savings to index-hugging mutual funds that charge rock-bottom fees.

Klein says, of Pimco’s funds, that “there simply isn’t an excuse for paying those kinds of fees unless you expect performance to materially differ from a standard buy-and-hold index.” Except, he never says what “those kinds of fees” are.

Klein makes two big mistakes, here. Firstly, he thinks that it’s possible for big institutional investors to simply pick a fixed-income benchmark and track it, at very low fees. It’s not. The S&P 500 is easy to invest in directly; the Barclays Agg is not.

Secondly, Klein thinks that Pimco’s fees, for its big institutional clients, are significantly higher than the “rock-bottom fees” you can find in a “buy-and-hold index”. Again, this is simply not true. You can’t buy-and-hold bonds: they constantly mature, and need to be reinvested in something new. Which is expensive, and non-trivial. Pimco and Blackrock, with their scale, can do that job more effectively than just about anybody else — which means that they can compete aggressively on fees against just about anybody else.

So not only is there no simple way of investing in bond indexes, even if there were such a way, it would not be significantly cheaper than most of the products being offered by Pimco. If you want to invest in bonds, you basically have to pick an active manager.

Investors have a choice between Pimco and its competitors, but they don’t really have a choice to pick “none of the above” and go with an entirely passive strategy. What’s more, if they did want an entirely passive strategy, and set up a fee scheme where any deviation from the benchmark would be punished, then I’m pretty sure that Pimco could provide them that product at a cheaper price than just about anybody else.

COMMENT

I was wondering what happened to the mac n cheese with mushrooms and truffle oil I had at the vegan festival, I didn’t see it on the menu?We are sexy babes like our facebook page and let’s have some fun… https://www.facebook.com/photo.php?fbid= 257391074453047

Be happy that Stan Fischer worked at Citi

Felix Salmon
Feb 10, 2014 18:30 UTC

Last week, Justin Fox had a great post entitled “How Economics PhDs Took Over the Federal Reserve”. The first Fed chairman of the modern era was a banker, Marriner Eccles; he was succeeded by Thomas McCabe, who had a bachelor’s degree in economics but whose main qualification was having been the CEO of Scott Paper. Then William McChesney Martin moved over to the Fed from Treasury; he was a former stockbroker and New York Stock Exchange president, and ushered in a new era:

Under Martin, regulating the economy through monetary policy pushed aside bank regulation to become the central bank’s No. 1 job. So hiring economists, and bringing people with serious economics backgrounds onto the FOMC, became a priority…

The new Fed Board of Governors (assuming the Senate confirms the latest nominees) will include veteran economics professors Yellen, Stanley Fischer, and Jeremy Stein, plus Lael Brainard, an economics PhD who has spent most of her career in Washington but did teach at MIT for a few years early in her career. The other three members are lawyers who have spent much or most of their careers in government. As for the Federal Reserve Bank presidents, eight of the 12 have economics PhDs and seven of those have spent much or all of their careers at the Fed. Two of the non-PhDs have spent their careers at the banks they lead, while only two bank presidents — Atlanta’s Dennis Lockhart and Richard Fisher of the Dallas Fed — fit the pre-1950 Fed mold of successful bankers/businessmen doing a stint as central bankers.

The ascendancy of the professoriat didn’t serve the Fed particularly well: without real-world business or banking experience, the FOMC ignored the problems of growing leverage, particularly in the financial sector, for far too long. Alan Greenspan’s Fed was run on laissez-faire principles: the market is a self-correcting mechanism which doesn’t allow banks and shadow banks to become too leveraged. Or, to put it another way, if investors are happy buying structured credit products at razor-tight spreads over Treasuries, then who are we at the Fed to spoil their party.

When the credit crisis first hit, in 2007, worries spread out from Wall Street: mortgage bankers first, then banks more generally, then the New York Fed, which is very plugged in to real-world concerns in the financial sector. The problem was the final leg, from the New York Fed to the Federal Reserve Board: for all that there might be a problem in practice, the economists in Washington couldn’t see how it would be a big problem in theory. And so they convinced themselves, in the notorious words of Ben Bernanke, that the subprime problem was going to be “contained”.

It’s therefore a real problem that the American central bank — which is, after all, a bank, and an incredibly profitable one, at that — has precious few actual bankers on its governing board. I’m all in favor of having a significant number of monetary economists who can think deeply about the effect of short-term interest rates on employment and inflation. But at the same time, it would be nice to have a few people who understand financial markets, and the pass-through mechanisms which define them. Not to mention a relatively sophisticated understanding of what banks actually do, on a day-to-day basis. After all, the Fed is the main prudential regulator of the banking system, and its board needs to understand where the stresses are.

All of which serves to underscore what an excellent nominee Stanley Fischer is as vice-chair of the Federal Reserve. Yes, he’s a professor — indeed, he wrote the definitive macroeconomics textbook, which is now in its twelfth edition and still going strong. He’s also a deeply experienced central banker and international policymaker. But he also has some real-world banking experience, having worked in a senior level at Citigroup from 2002 to 2005.

According to Pedro da Costa, however, Fischer’s years at Citi will count against him when he appears at his confirmation hearing:

The nominee for Fed vice chairman is likely to face questions at his confirmation hearing about whether he would be a tough regulator of big banks after earning several million dollars at one.

This is, let’s say, unhelpful. Yes, Fischer earned good money when he was at Citi. But the reports about his financial disclosure form I think draw too much of a causal connection between his Citi tenure and his wealth. Here, for instance, is Bloomberg’s Joshua Zumbrun:

While Fischer has spent much of his career as an academic and government official, he served as vice chairman of Citigroup Inc. from 2002 to 2005 and amassed a personal fortune of between $14.6 million and $56.3 million, a sum that would make him one of the wealthiest Fed officials.

The implication here is that Fischer had a modestly-remunerated public-service career before he joined Citi and cashed in. Which really isn’t true. Fischer’s tax-free income at the World Bank and IMF was substantial, and he surely made just as much money when he was at MIT. But the real money, I’m quite sure, came from that textbook, which he co-wrote with Rudi Dornbusch. It was the macroeconomics textbook of the late 1970s, and, like all standard textbooks, became something of a license to print money. (The trick is to keep on updating the textbook with new editions, making old second-hand versions useless and forcing students to pay three-digit sums for the version being used in class.) If Fischer took his textbook proceeds and invested them conservatively into the great bull market of the 1980s and 1990s, that alone would make him a very wealthy man today.

Fischer left Citi before it imploded, but he was there while it was manufacturing many of the toxic subprime products which ended up proving all but fatal. Mortgage products weren’t Fischer’s area, but he did work very closely with Robert Rubin, who was blithely unconcerned about the risks being built up. That’s an incredibly important and valuable lesson to learn: you can’t trust wise men like Rubin to see what’s going on in front of their face. And when bank CEOs tell the Fed board that they have everything under control, Fischer will know better than most just how little those statements can be trusted.

I doubt that Fischer will have any real problems being confirmed. Any senators who want to cause mischief can certainly do so — they can point to his private-sector experience, or they can bellyache about how he has various different nationalities rather than being “100% American”. But Fischer is probably the best central banker in the world; it would be completely insane for the Senate to block him. Especially given that he brings some of the actual banking experience that the Fed so desperately needs.

COMMENT

LOL Felix ascribes to the “Great Man” theory of history, which is largely not true and anachronistic after-the-fact rationalizing. Does Felix really think that the Fed has influence over the economy? Another Fischer, Fischer Black, who won the Nobel in 1997, thought not. And the Fed has staff that does the hard work behind the scenes; the chair is largely a figurehead. As for voting, it’s been found that most of the players follow the lead of the head, that would be Yellen. I doubt therefore that nixing Fischer would be so bad, and, like the posters say before me, might send a message that rich fat cats from Citi are not to be rewarded.

Posted by RayLopez | Report as abusive

Sensible data

Felix Salmon
Jan 14, 2014 20:40 UTC

I have an essay in the January issue of Wired about the limits of quantification. In the magazine it’s headlined “Why Quants Don’t Know Everything”, but online it’s been retitled “Why the Nate Silvers of the World Don’t Know Everything” — which is a little unfortunate, since the whole essay is deeply indebted to Silver’s book, which makes substantially the same point.

The initial idea behind the essay was the concept of priests vs quants — the seemingly eternal (but actually only quite recent) distinction between people who trust numbers, on the one hand, and, on the other, people who rely instead on their personal expertise and experience. Think of the difference between Billy Beane, using dispassionate analysis to outperform in baseball, and Bobby Fischer, whose gifts at chess seemed almost god-given. Nowadays, in a world of quasi-infinite data, it seems the quants are in the ascendant, while the priests are reduced to fighting a rearguard action, clinging desperately to some vestige of relevance. Today, if you want to change someone’s mind, you don’t appeal to authority: instead, you bring numbers.

The result is a deep societal disruption, in which quants take on priests and win: the Oakland A’s against the Yankees, the Obama team against Romney’s. It doesn’t take long before the war is won — we’ve all seen this particular movie before, especially the kind of people who sit on boards of directors. Thus does the priesthood wither away, taking with it a huge amount of valuable institutional knowledge.

The rise of the quants is, unsurprisingly, one of the driving forces behind Silicon Valley venture capital: if you start a small company which competes with a huge company, and the small company gets a few significant wins, then there’s almost no sum the bigger company won’t pay to acquire its smaller foe and use those skills against its competitors. The small company never needs to make money: all it needs to do is show disruptive potential, and it becomes enormously valuable.

But the data-rich narrative — the idea that science is taking over the world — has bred its own counter narrative for some 200 years now, ever since Mary Shelley published Frankenstein in 1818. People don’t like the idea that the computers are in control: for a prime example, look at the way Twitter exploded with privacy concerns as soon as it was announced yesterday that Google was buying Nest.

Or, just look at popular entertainment. The dweeby Q, in Skyfall, tells James Bond that “I can do more damage on my laptop sitting in my pajamas before my first cup of Earl Grey than you can do in a year in the field.” But Q isn’t the hero: Bond is. Similarly, it’s incredibly easy to paint Wall Street quants as the big villains in financial-crisis stories.

When the quants come into an industry and disrupt it, they often don’t know when to stop. They’re young, they’re arrogant, they’re rich and powerful – and they tend not to have decades of institutional knowledge about the field in which they have found themselves. They don’t work for the people who know such things, and they don’t listen to them, either. They’re winners, what do they have to learn from dinosaurs?

Put like that, the risks are obvious. Quants are just as blinkered, in their own way, as the priests they replace – even more so, in fact, since they can be quite Spock-like in their inability to understand the deep role that certain institutional functions are playing. Quants are great at coming up with clever ways of analyzing the world. But that doesn’t mean they’re great at managing institutions, or understanding how their employees might end up gaming the systems that they’ve created.

The solution to such problems is not to disdain the quants, as Bond does Q. Rather, it’s to synthesize the best of both worlds. Look at Southwest Airlines, for example: it has some of the most sophisticated operations geeks in the business, governing everything from fuel-price hedging to the most efficient way to board an airplane. But that doesn’t stop it having a much more human face than its larger competitors. Apple, too, is a prime example: quantitative to its toenails, it nevertheless is clearly governed by overarching principles of human-focused design. And why did Nest succeed where Google Power Meter didn’t? Just because it was designed in a way which made it desirable as a consumer product.

The secret ingredient, I think, is to ensure that managers have a deep understanding of the science being used in the organization — and also of its limitations. Great technology is all well and good, for instance, but if you want it to be broadly adopted, then you need a whole other set of packaging skills as well. And you can’t take technology further than its natural limits, either. It wasn’t really the Gaussian copula function which killed Wall Street, nor was it the quants who wielded it. Rather, it was the quants’ managers — the people whose limited understanding of copula functions and value-at-risk calculations allowed far too much risk to be pushed out into the tails. On Wall Street, just as in the rest of industry, a little bit of common sense can go a very long way.

COMMENT

You can’t discuss this question without talking about short-term vs. long-term thinking.

Most of the problems in the world today, including those related to quantification, can be traced to the glorification of short-term thinking at the expense of long-term thinking.

In essence….maximize profits and damn the consequences.

Posted by mfw13 | Report as abusive

The JP Morgan apologists of CNBC

Felix Salmon
Sep 29, 2013 04:14 UTC


I don’t know which producer at CNBC had the genius idea of asking Alex Pareene on to discuss Jamie Dimon with Dimon’s biggest cheerleaders, but the result was truly great television. What’s more, as Kevin Roose says, it illustrates “the divide between the finance media bubble and the normals” in an uncommonly stark and compelling manner.

The whole segment is well worth watching, but the tone is perfectly set at the very beginning:

Maria Bartiromo: Alex, to you first. Legal problems aside, JP Morgan remains one of the best, if not the best performing major bank in the world today. You believe the leader of that bank should step down?

Alex Pareene: I think that any time you’re looking at the greatest fine in the history of Wall Street regulation, it’s really worth asking should this guy stay in his job. In any other industry — I can’t think of another industry. If you managed a restaurant, and it got the biggest health department fine in the history of restaurants, no one would say “Yeah, but the restaurant’s making a lot of money. There’s only a little bit of poison in the food.”

This is a very strong point by Pareene — and it’s a point which was well taken by Barclays. When the UK bank was fined $450 million last year for its role in the Libor scandal, its CEO duly resigned. After all, a $450 million fine is prima facie evidence that the CEO really isn’t in control of his bank.

But $450 million is a rounding error with respect to the kind of fines that Dimon is now talking about paying — $4 billion, $11 billion, $20 billion, who knows where this will stop. Tim Fernholz has a good roundup of all the various things that JP Morgan is in trouble for; Libor manipulation is at #5 on his list of seven oustanding investigations — on top of another four settled investigations. If Libor manipulation alone was enough to mean the end of Bob Diamond, it’s hard to see how Jamie Dimon should be able to survive this tsunami of litigation.

Unless, it seems, you work for CNBC. In which case you just ignore Pareene’s question, and get straight onto the important stuff:

Duff McDonald: It’s preposterous. The stock’s touching a ten-year high. It’s a cash-generating machine.

Maria Bartiromo: Should we talk about the financial strength of JP Morgan? The company continues to churn out tens of billions of dollars in earnings and hundreds of billions of dollars in revenue. How do you criticize that?

This view — that profits cleanse all sins, and that so long as you’re making money, nothing else matters — is not normally expressed quite as explicitly as it was here. After all, there are licit and illicit ways of making money, and surely if your profits fall into the latter category, you should not be able to remain comfortably ensconced as a celebrated captain of industry. Besides, banks shouldn’t be obscenely profitable: they’re intermediaries, and in an efficient economy their profits should be quite easily competed away. When bank profits are high, that’s a sign that the bank in question is extracting rents from the economy, rather than helping it to grow.

The rest of the interview is a glorious exercise in watching CNBC anchors simply implode in disbelief when faced with the idea that JP Morgan in general, and Jamie Dimon in particular, might be anything other than a glorious icon of capitalist success. In the world of CNBC, the stock chart tells you everything you need to know, while the New York Times is a highly untrustworthy organ of dissent and disinformation.

Eventually, Bartiromo asks Pareene, with a straight face, who would be the best CEO of JP Morgan “from a shareholder perspective”. Since, clearly, the shareholder perspective is the only one that matters. Except, of course, it isn’t. JP Morgan’s balance sheet shows assets of $2.4 trillion and liabilities of $2.2 trillion, leaving $200 billion in total stockholder equity. Sure, the shareholders matter — but even in terms of the balance sheet they only matter about 8.6%. And in terms of the systemic importance of JP Morgan to the nation as a whole, its shareholders matter even less. The country was seriously damaged by JP Morgan’s lies and misrepresentations about its mortgages — much more than it would be damaged if the share price went down instead of up. And the public has every reason to want the individuals running JP Morgan to be held accountable when it gets into serious regulatory trouble over and over again.

Right now, the banks aren’t lending money to homeowners — the government remains the only game in town, when it comes to mortgages, and that isn’t healthy at all. JP Morgan’s shareholders might be happy with Jamie Dimon, but that doesn’t mean the rest of us should be. Jesse Eisinger wants the banks executives to face personal charges; whether that happens or not, it still behooves them to take responsibility for the long series of egregious errors that JP Morgan has made. Shareholders might not want to see Dimon go. But if JP Morgan does end up paying an 11-digit fine, then resignation would surely be the honorable thing to do.

COMMENT

The way I look at it, we have to reckon with one of two things here:

1. Dimon did not have control of the company and did not know what aspects of his business were going on with what, which makes him incompetent. I don’t personally think he is, honestly.

Or

2. Chase is such a big entity that it is, effectively, ungovernable by its own leadership. This illustrates the inherent problem with letting entities get to the size they do in our corporate hegemony.

Well, there is a third option, pay 20 billion dollars in fines and allow our limp wristed government to simply make it go away, which is going to happen.

We’re doomed.

Posted by Phunkshun | Report as abusive

Judging Treasury

Felix Salmon
Sep 16, 2013 15:56 UTC

There’s a fascinating heavyweight fight going on when it comes to writing what you might consider the official narrative of the financial crisis. The White House released its own 49-page report this morning, talking in glowing terms of the successes that the Obama Administration has made on the financial-reform front. Meanwhile, this week’s issue of Time magazine takes the opposite tack in a tough cover story by Rana Foroohar, headlined “How Wall Street Won”.

The interesting thing about this fight is that it has actually been engaged: Treasury responded to Foroohar on its website, and she of course replied to them. (If the first link to her cover story steers you into a paywall, then try going from her blog post: that might work.)

It’s also worth noting Foroohar’s “to be sure” sentence, in her introduction: “The truth is,” she writes, “Washington did a great job saving the banking system in ’08 and ’09 with swift bailouts that averted even worse damage to the economy.” She’s right about that — but neither side of the debate dwells for long on that fact, partly because most of the emergency actions which saved the banking system were put in place by the George W Bush administration, rather than the current lot.

If you think of the economy as a ship, then what the Obama administration inherited was a crippled vessel, still afloat, but badly damaged from a serious fire in the boiler room. It had fallen to the Bush administration to actually put out the fire, which they did. And so the Obama administration set to work trying to fix the ship, with things like the original stimulus package. And they also had to fix up the damaged boiler room, and ensure that it would never again explode in such a devastating manner. That was the job of Dodd-Frank, as well as Basel III.

Foroohar’s point is pretty simple. The US economy is far from ship-shape right now — just look at the unemployment rate, or the employment-to-population ratio, or the median wage, or any other measure of how the broad mass of Americans is faring. The 2009 stimulus might have done a bit of good at the margin, but here we are, five years after the crisis, and the Federal Reserve still feels the need to pump $85 billion a month into the economy in its latest round of QE, on the grounds that interest rates are at zero and can’t be lowered any further. The economy, in other words, finds it hard to stay afloat without artificial aid.

And then, when you go down into the boiler room, it has been patched up here and there, and people are still working on some of the more damaged areas — but if you look at the whole thing, it’s not exactly explosion-proof. Sure, it’s safer than it was in 2007, but that’s not saying very much. And when people like Gary Gensler try to come in and add some crucial regulators to highly dangerous parts of the system, they get stymied — by none other than Treasury itself!

Treasury’s take, by contrast, is more granular. Look at TARP — it made money! Look at the stress tests — they worked! Look at the first derivatives on measures like house prices, credit flows, and total household wealth — they’re positive!

Neither take tells the whole truth, although the Obama administration is probably the more disingenuous of the two: “as a matter of law,” writes Treasury’s Anthony Coley, “Dodd-Frank ended the notion that any firm is ‘too big to fail.’” Er, no, it didn’t. Lots of us still have the notion that there are dozens of firms which are too big to fail — and other entities, too, like the state of California. It might be less likely, now, that any given firm will fail. What’s more, if and when a big firm does fail, there’s now a semblance of a procedure to follow, which — if everything goes according to plan — might even involve zero federal dollars. But still, too big to fail is too big to fail, and ultimately, if push comes to shove, the implicit government backstop is still there.

The thing is, the TBTF problem is endemic to modern finance — there was no realistic way that the Obama administration or any other government could ever stop it from being the case. In theory, we could have let the entire boiler room melt down, to the point at which it could no longer inflict any more damage. That’s what Michael Lewis thinks we should have done: “I don’t feel, oh, how sad that Lehman went down,” he says. “I feel, how sad that Goldman Sachs and Morgan Stanley didn’t follow. I would’ve liked to have seen the crisis play itself out more.” But if that had happened, the whole ship would have sunk — and would have taken the entire global economy down with it. Yes, there’s moral hazard in bailing out banks. But the time to deal with moral hazard is before the crisis hits. Once the boiler room is ablaze, the first job of the stewards of the ship is, always, to put out the fire. Even if — especially if — that means protecting parts of the system which are inherently dangerous.

Ultimately, I think that both the White House and Foroohar are far too invested in a narrative where the government is in control, and can effectively determine the state of not only the US financial system but also the entire US economy as a whole. When in fact, of course, it can’t even nominate its preferred candidate to become the chairman of the Federal Reserve. The Obama administration could have done better, both in terms of bank regulation and in terms of broader macro policy. But it was operating within real constraints, both nationally and internationally. And the prospect of fireproofing the engine room so that no crisis would ever happen again — well, that was always impossible, for any government, in any country bigger than, say, Bhutan.

Overall, if Treasury is giving itself an A for its post-crisis actions, and Foroohar is handing out a C, then I’d duck the question and point to the bigger truth — that the quality of Treasury’s actions is not nearly as consequential as most people think. We live in a path-dependent liberal democracy, and the older our democracy gets, the more entrenched it becomes, and the harder it is to change anything truly fundamental. Treasury’s tinkering was, at the margin, a positive force, and I’m glad they did what they did, even as I wish they had done more. But I don’t kid myself that if they had done more, it would have made all that much of a difference. Or, for that matter, that if they had done less, things would have been noticeably worse than they are right now.

COMMENT

You forgot something, Felix. The Obama Administration inherited a crippled ship with a damaged boiler, AND FIVE MILLION PASSENGERS THROWN OVERBOARD into unemployment, plus another 4 million hanging onto the side of the ship about to fall in. Oh, and half the crew was planning a mutiny and refused to help the captain right the sh.

A bit hard to replace the boiler when you are trying to fish the survivors out of the water. And when half the crew is planning a mutiny and refusing to help the captain right the ship.

Posted by TominWis | Report as abusive

Summers over

Felix Salmon
Sep 15, 2013 20:58 UTC

David Wessel has the scoop: Larry Summers has bowed to reality and is withdrawing from consideration as Fed chair. His last-minute attempt to distance himself from Citigroup was far too little, far too late: with Democratic opposition in the Senate only getting harder, it was at this point more likely than not that any Summers nomination would actually fail to get through Congress.

Michael Hirsh’s anti-Summers National Journal cover story landed on the desks of everybody who matters in Washington at the end of the week, and it had its intended effect: no matter how much the White House wanted Summers to get the job, those pesky Constitutional checks and balances would conspire to ensure that it would never be his.

This is extremely good news, of course. Summers was the wrong man for the job, and his withdrawal leaves the door wide open for the best-qualified candidate, Janet Yellen, to step into the chairmanship. Summers simply shouldn’t be a leader of any major institution: he’s too cocksure, too abrasive. He failed at Harvard; since then, his metier has been that of consigliere: quietly (or not so quietly) whispering in the ear of real leaders like David Shaw or Barack Obama. He’s good at that. But Summers has tasted real power, first at Treasury and then at Harvard, and is young enough, and ambitious enough, to want to relive the experience.

It’s not going to happen — not at any major public institution, in any case. Summers didn’t become Treasury secretary, when Obama first took office; he didn’t become the head of the World Bank; and he has now failed twice to become Fed chair. That’s it: four strikes, and he’s done. He is now free to make many millions of dollars in the private sector — or, rather, to continue to make many millions of dollars in the private sector, since he’s a prime example of a man who revolves straight into highly-paid consultancies the minute he leaves government.

The presumptive-nominee status of Yellen will leave a bad taste in many White House sources’ mouths — they’ve been quietly briefing against her for months, and the unedifying spectacle of seeing the Fed chairmanship turn into a horse race has done her no particular favors. Obama should know, however, that if he nominates any man whatsoever for the job, the howls from women will be heard very loudly indeed.

The real lesson of the past few months, however, is that the Fed chairmanship should never become a political football. If Obama wanted to nominate Summers, he should have just done so, rather than raising a trial balloon in July and then letting it slowly deflate. Both Alan Greenspan and Ben Bernanke were nominated by a Republican and then re-nominated by a Democrat: that above-politics status is exactly as it should be. I hope that Washington will learn from this debacle, and that if the Republican candidate wins the next presidential election, he or she will feel free to re-nominate Janet Yellen. That would be the sign we all need that the Fed chair is a technocratic position, not a political one.

COMMENT

Summers was wrong fro the job agreed. But Yellen? Gender aside the record of the fed through the crisis has been one of abject failure.

The choice between summers and an insider is startlingly poor.

Surely there were better choices?

Posted by Urban_Guerilla | Report as abusive

Hank Paulson, hero?

Felix Salmon
Sep 12, 2013 22:22 UTC

1338_cov304x4151.jpgHank Paulson had a good crisis. That’s why he’s getting hero-worship on the cover of Bloomberg Businessweek magazine; he is also pretty much the sole interviewee in a hagiographic 90-minute documentary, produced by Bloomberg, which is about to appear on Netflix. The combination is being promoted with the idea that “no one felt the impact” of the financial crisis more than Paulson, which is obviously false, but which also gives a pretty good idea of the whole project’s point of view. (The film never mentions, for instance, that Paulson received more than $500 million, tax free, for his Goldman Sachs stock when he sold it before moving to Treasury.)

Paulson has an interesting take on the various ways in which the crisis could have gone worse. First there was Bear Stearns: if he hadn’t managed to rescue the bank by finding a buyer in JP Morgan, says Paulson, then the chain reaction would have started. “If Bear Stearns had gone, then Lehman would have gone immediately thereafter, and we hadn’t fixed Fannie or Freddie yet. We would have had Armageddon”. The Bear rescue, according to Paulson, bought precious months during which Paulson could deal with Frannie, and during which Ben Bernanke could start setting up the various borrowing windows and liquidity programs which would help to stabilize the financial system.

Paulson also says, in the documentary — and this is a theory I haven’t heard before — that we would have been worse off if Bank of America had bought Lehman Brothers. If that had happened, he says, then there wouldn’t have been any buyer left for Merrill Lynch — and Merrill’s implosion would have been much worse than Lehman’s was.

It would be nice to see these claims — and Paulson’s tenure more generally — interrogated impartially by the Bloomberg Businessweek editorial machine, which is pulling out all the stops in terms of publicizing its Paulson extravaganza. (It’s even roping in Mike Bloomberg himself, something which has never happened before.) But with a documentary director who now considers Paulson to be “a national hero”, and a cover story which bears Paulson’s own byline, the former Treasury secretary was never going to be facing any tough questions.

To their credit, on the other hand, Bloomberg invited me to a promotional lunch with Paulson today, and so I took the opportunity to ask him about the perception that he always thought that he knew best, and that he considered popular opinion, and elected representatives, as annoying obstacles.

Paulson replied by saying that he “could not take greater exception with your comment”. He talked at some length about how he used his Goldman-honed client-schmoozing skills to get what he wanted from Congressional representatives on both sides of the aisle, but I must admit that I didn’t come away from his answer feeling as though he really respected those people’s views, or the importance of public opinion. And I’m perfectly happy to defend the argument that the arrogance of Paulson asking for a $750 billion blank check by presenting a three-page TARP bill was a significant reason why that bill was defeated.

I’m also happy that I got to ask Paulson about the secret meeting he held with the Goldman Sachs board in Moscow in June 2008. Even at the time, Paulson’s advisers thought it unwise; with hindsight, it seems indefensible. What could he have been thinking? But Paulson was unapologetic: “The incident you referred to was totally and completely appropriate,” he told me. “With a board of directors, people I hadn’t seen for years, I went to a social function with them, when we were in the same hotel, and said hi, and saw old friends”.

I don’t blame Paulson for the financial crisis; he was a good crisis manager — certainly better than either of his predecessors would have been — and he worked extremely well with Ben Bernanke and Tim Geithner. Still, everybody made mistakes during those long sleepless weeks, and it would be nice if some of the principals were more willing to admit that. And I also look forward to rather harder-hitting documentaries from Bloomberg in the future. This one feels altogether too promotional — both of Paulson and of Bloomberg Businessweek itself. The film is basically just one long interview with Paulson, intercut with a few words from his wife, and quite a lot of contemporary news footage and headlines. Including, notably, this anachronism:

Screen Shot 2013-09-12 at 4.42.30 PM.png

This story came out in November 2008; Bloomberg didn’t buy Businessweek until October 2009. Both Bloomberg Businessweek and Hank Paulson have a lot of good qualities. But this film does end up feeling as though it’s trying a bit too hard to make them both look good.

COMMENT

Caught that current Bloomberg magazine cover of Paulson trying to look like some kind of beleaguered tough-guy poor heroic Hank under siege but toughing out his super-lucrative Post-Treasury/Post Goldman idle time…

Plus his kissy-face interview with his fully-disclosed good buddy Charlie Rose, along with the very weaselly Bloomberg magazine editor plus the equally in-the-Paulson-tank documentary director.

Seems there’s a Hanky Paulson p.r. clean-up campaign underway, “poor tough Hanky saved the planet” back in 2008 when really he just happened to be the guy who had Congressional members always seeking post-gov’t jobs and lucrative post-Gov’t careers/consultancies trying to stay on Hanky’s good side.

To this day, as the NY Post’s John Crudele reminds and attempts to gain access to the gov’t docs. How Hanky during the crucial days in SEPT/OCT 2008 spent numerous – scores – of yet-undisclosed/undefined phone conversations with his Goldman Sachs CEO successor, Lloyd Blankfein. Gee, wonder what these two apparent connivers were talking about that no one else knew, or likely won’t ever know?

Then there was the disgusting image of Hanky-boy joking about how he literally – literally – knelt at the expensively-shod feet of then-House-Speaker Nancy Pelosi as Hanky-boy desperately sought unimaginably huge sums of taxpayer funds and almost singular control over same.

And ol’ Hanky-boy wasn’t so shameless to seem to seek direct bailouts for Goldman and his other banking buddies (except of course Dickie Fuld, whom evidently Hanky-boy had some sort of snitty disdain for).

No, Hanky didn’t seek direct bailouts for his banking buddies. Instead, he coyly and Pelosi-foot-kissingly sought to bailout the bankers’ COUNTERPARTIES, mainly AIG, and that way, AIG took the heat and Goldman et al and some of Hanky-boy’s other favorites got bailed.

As an ardent FREE-MARKET advocate, it’s increasingly disgusting to see these kinds of oligarchic set-ups whereby you have Wall Street heavyweights revolving into and out of high, super-influential gov’t offices. Robert Rubin, Jacob Lew, Timothy Geithner, Paulson, and a truly cretinous exemplar of the breed: Jon Corzine.

On top of everything else, these “hotshots” like to run around claiming they’re the “smartest guys in the room,” yeah, it’s easy to be “smart,” when you have access to untold sums of that other slimey favorite tactic, “other people’s money” – especially taxpayers. And another Hanky-boy tactic is to come across as some kind of mumbling, down-home aw-shucks humble little me. Like Corzine, Lew, Rubin et al instead he is a relentless practitioner of taking often senseless risks with other peoples’ funds.

These “smart guys,” increasingly put not just the economic health of the nation at risk, they’re inviting the kind of oppressive regulation that risks curtailing the free-market’s highest ideals and benefits.

And let’s not even get started about how a lot of these cats belong in jail for long periods of time. And keep in mind in China, and self-described “Chinese expert” Hanky-boy should realize this. In China, they sometimes SHOOT those convicted of rank corruption. DickSheppard-Jersey City, NJ

Posted by DickShepJCNJ | Report as abusive

Larry Summers and the politicization of the Fed

Felix Salmon
Aug 29, 2013 21:00 UTC

Ezra Klein has an excellent piece on Larry Summers today, basically saying that he’s “the overwhelming favorite” to become the next Fed chair just because he’s an old Clinton hand, and is trusted by all the other old Clinton hands with whom Barack Obama has surrounded himself. (Interestingly, that’s a phenomenon unique to the economic team: no other department exhibits the same trait.)

The top slots on the economic team are all held by members of the Clinton clique. Sperling leads the National Economic Council. Lew is secretary of the Treasury. Furman is chairman of the Council of Economic Advisers. Sylvia Matthews Burwell, deputy director of the Office of Management and Budget during the Clinton administration, now heads OMB…

It stretches credulity to believe that a pure meritocratic process has simply and ineluctably led to the same six or seven people cycling among positions.

Klein’s thesis, when it comes to economic appointments, is that “the bar for each appointment is that the economic team already likes the candidate and knows he or she is good at the job and will work well with the other members of the team”. The reality of economic appointments to date is entirely consistent with that thesis, and I, for one, am convinced.

But here’s the problem: such a mechanism is a bad idea in principle, a bad idea in practice, and an especially bad idea when it comes to the Fed chairmanship in particular.

In principle, it’s even harder for a team like this one to learn from its mistakes than it is for an individual to do so. When the world changes, individual technocrats tend to change with it. But when a small, close-knit team is put in charge of running the economic policy of the global hegemon, they create the facts on the ground. In practice, what that has meant is a depressingly predictable cycle of laissez-faire regulatory policy leading to crises, which are solved with massive bailouts, which leave the financial sector largely unscathed, and free to continue taking excessive risks, safe in the knowledge that if and when things blow up again, there will be yet another bailout.

This cycle creates what I call Obama’s dangerously heroic view of economic technocrats — a view which, it should go without saying, works very much to the advantage of the very advisers who have helped him develop it. It’s a view which places crisis-management skills far above crisis-prevention skills, and which considers crisis-management experience as being uniquely valuable. It’s also a view which makes it almost unthinkable for Larry Summers not to be nominated to the Fed: short of nominating Terry Checki to the position, it’s hard to imagine a candidate with more crisis experience than Summers.

But it’s one thing having groupthink within the White House — it’s the job of a disciplined executive branch to implement clearly-articulated policies, and if the populace doesn’t like it, they can kick the incumbents out at the next election. It’s something else entirely to take one of the most central — and most political — members of the White House team, and nominate him to lead the independent board of governors of the Federal Reserve.

Make no mistake: Summers would be the most political Fed chair in living memory. Greenspan was pretty bad, especially when he testified — in clear support of the Bush administration’s tax cuts — that we had reason to be worried about budget surpluses. But Summers has been one of Obama’s closest economic advisers since the day that Obama took office: he’s much closer to Obama than Greenspan was to Bush.

Summers has spent most of the past five years doing everything in his power to shape and advance Obama’s agenda. Obama, of course, is very happy about this, and would love to reward Summers for his loyalty by handing him the Fed chairmanship.

Summers is not a consensus-builder; he’s the kind of person who, as chairman, would be convinced that he was right, and who would bully the rest of the board into doing exactly what he wanted them to do. (In this, he would have the active help of Obama, who would certainly nominate Summers-friendly names to the multitude of open board positions, and to the vice-chairmanship.) The result would be a central bank which had, to a first approximation, zero independence from the government, at least so long as Obama is president.

A non-independent central bank is a bad thing; a bullying central bank chairman who’s determined to get his own way is also a bad thing. (The Fed is run by a diverse board of governors for a reason.) But put the two together, and you get a uniquely toxic combination, a way to fulfill all the craziest conspiracy theories of Ron Paul. Having what Klein calls the “Clinton clique” in sole command of Obama’s economic policy is bad enough. But it would be much worse if they essentially managed to engineer a hostile takeover of the Federal Reserve Board.

When Tony Blair became prime minister of the UK in 1997, the first thing he did was to make the Bank of England independent. It was a signal that he was committed to orthodox economic policy, and that he was willing to be punished by an independent central bank should his policies go awry. It didn’t exactly work out that way, in the end, but his initial decision was clearly the right one, and came from a position of strength and self-confidence.

If Obama nominates Summers to the Fed, the message will be the exact opposite: that he’s not going to be comfortable unless he can install his own man to run the show. Obama, it seems, can’t trust Yellen to do the right thing — or maybe he worries that her actions will reflect the consensus of the board as a whole, and will therefore be less predictable and controllable. So he’s going to pass her over, and put a political operative in charge instead, albeit a political operative with genuine economic chops.

That’s a move even Clinton would never have dared make: he kept Greenspan at the Fed for his whole presidency. And it sets a horrible precedent: the next Republican president will henceforth have no compunctions whatsoever about appointing a party hack to the post. From here on in, if Summers gets the job, we won’t just be voting for president in presidential elections. We’ll be voting for Fed chair, too. And the Fed will become just as politicized as the Supreme Court has become.

COMMENT

CraigPurcell: Yes, yes, yes, yes, yes, yes, yes.

This is what Felix said, and about this, now, he is correct:

“when a small, close-knit team is put in charge of running the economic policy of the global hegemon, they create the facts on the ground. In practice, what that has meant is a depressingly predictable cycle of laissez-faire regulatory policy leading to crises, which are solved with massive bailouts, which leave the financial sector largely unscathed, and free to continue taking excessive risks, safe in the knowledge that if and when things blow up again, there will be yet another bailout.”

AND

“Having what Klein calls the “Clinton clique” in sole command of Obama’s economic policy is bad enough. But it would be much worse if they essentially managed to engineer a hostile takeover of the Federal Reserve Board.”

which means that the Federal Reserve would be fully transformed into a political extension of the Supreme Court, and we would have complete unity of Executive and Judicial branches, with the full backing of the Obama-Fed.

Why doesn’t anyone care? I have lost all trust in Professor Bradford DeLong. Felix, you see more clearly, or maybe, you are more honest and brave. No one listens to you. When you were towing the line, although who knew for certain what “towing the line” was, not with certainty, a few years ago, you had lots of happy fans. Maybe you still do. I hope so. I am not happy, but at least I know that I’m not part of a Ron Paul conspiritard-fever dream. It is real, you are right. Oh Felix, this is so grim.

Posted by EllieK | Report as abusive
  •