Felix Salmon

Thank you, internet: Henry Farrell and his commenters have all the snark so desperately required in response to Alan Greenspan’s ludicrous op-ed in the FT. And they’re not alone: as Alex Eichler notes, “everyone is laughing at Alan Greenspan today”. Greenspan could hardly have made himself look like more of an idiot if he’d tried, not only because the “notably rare exceptions” construction is so inherently snarkworthy, but also because it’s so boneheadedly stupid. Anything which normally makes money is a good idea if you ignore the times that it doesn’t work.

That said, it’s worth looking in a bit more detail at Greenspan’s nutty ramblings, because scarily they’re actually representative of what much of the financial sector believes these days. (And Clive Crook, too.) The context is the GOP-controlled Congress, which has the ability to hobble or even abolish key parts of Dodd-Frank. And Greenspan is urging them on, saying that the early consequences of Dodd-Frank “do not bode well”. In order to do this, he first sets up a straw man, saying that Dodd-Frank was designed to “readily address” the causes of the financial crisis. It wasn’t, of course, but Greenspan pretends it does, and proceeds to give five examples of how it fails to do so, helpfully delineated with bullet points.

The first is that the credit rating agencies didn’t like the idea that they should take responsibility for their ratings. Well of course they didn’t like that idea — but the SEC was so captured that it happily waived the relevant bit of Dodd-Frank. Is it true, pace Greenspan, that the SEC’s supine reaction could not have been “readily anticipated”? Maybe. But the point here is that the unintended consequence of Dodd-Frank was a significant weakening of Dodd-Frank. Greenspan should be happy about this one! It’s the intended consequence of Dodd-Frank that he didn’t like.

Greenspan’s second point is that banks “contend” that they won’t afford to be able to issue debt cards if the Durbin amendment to Dodd-Frank goes through. This contention is silly, of course: no one’s going to stop issuing debit cards at all. But Greenspan believes them, maybe because his entire career was based on trusting whatever he was told by the banks, since banks are always going to do what’s best for their shareholders, and what’s good for bank shareholders is good for America. Or something along those lines, anyway.

Back in 2008, Greenspan admitted that there was “a flaw” in that reasoning, and that he was “very distressed by that fact”. But he’s clearly got over his distress at this point, and is back to his old tricks of simply parroting the spin of the very entities he was purportedly regulating. “Concerns are growing,” he writes, “that without immediate exemption from Dodd-Frank, a significant proportion of the foreign exchange derivatives market would leave the US.”

Who has these concerns? Greenspan doesn’t say, but I’ll let you into a secret: it’s bankers. They like trading derivatives because trading derivatives makes them lots of money. Does it help the broader economy, or create a significant number of jobs? That doesn’t really matter, and neither does any specificity as to what the word “significant” might mean in this context. This isn’t argument, it’s inchoate scaremongering.

Greenspan then moves on to the Volcker Rule, complaining that it puts US banks at a competitive disadvantage. Well, yes. If you have a central bank which takes its regulatory function seriously, then less fettered banks are likely to be at a competitive advantage to your own. Ask Canada. Which is feeling pretty smug, these days, about putting its banks at a competitive disadvantage.

And of course on the subject of international regulatory arbitrage, Greenspan makes no mention of the rumors that Barclays might relocate to the US, welcomed with open arms by Mike Bloomberg among others. Either Greenspan isn’t being intellectually honest here, or else he really believes it’s the function of government to relax regulations in every conceivable area to the point at which all governments compete to see who is the most laissez-faire in as many parts of the financial system as possible. He’s an acolyte of Ayn Rand, so that’s possible. But it’s not an idea which deserves serious consideration.

Finally, Greenspan defends high pay for bankers on the grounds that “small differences in the skill level of senior bankers tend to translate into large differences in the bank’s bottom line” — an assertion which cannot possibly have any empirical basis.

At this point, Greenspan clearly decides that nothing he writes need have any factual or even rational basis:

These “tips of the iceberg” suggest a broader concern about the act: that it fails to capture the degree of global interconnectedness of recent decades which has not been substantially altered by the crisis of 2008. The act may create the largest regulatory-induced market distortion since America’s ill-fated imposition of wage and price controls in 1971.

Well, he’s right that banks are just as interconnected now as they were pre-crisis. But how Dodd-Frank was meant to “capture” that, and what that has to do with “regulatory-induced market distortion”, is left as an exercise for the reader. I think that what he’s saying is that any deviation from a complete laissez-faire approach where banks can do anything they want is, ipso facto, a market distortion. And that since Dodd-Frank is the first time in living memory that bank regulation has got tougher rather than laxer, that gives him license to wax apocalyptic about unintended consequences and the like. Despite the fact that the main unintended consequence to boot seems to have been a massive increase in bank profits.

Greenspan concludes with a paean to financialization and leverage, which Yves Smith has already done a great job of demolishing.

The main problem with all of this is that it’s coming from someone who still, depressingly, is respected in certain policy circles — and who is using that credibility not to advance debate, but rather to lobby for his finance-sector clients. Last year, I thought that Greenspan had realized that he had been wrong in terms of regulatory policy, but not in terms of monetary policy. At this point, however, it seems that Greenspan is having second thoughts about his regulatory-policy apologies, and has reverted to his position of All Regulation Is Bad. I’m sure that’ll get him lots of cheers (and dollars from Wall Street. But it should be the final nail in his coffin when it comes to credibility. There have been many bad Fed chairmen. But Greenspan is out on his own as by far the worst former Fed chairman of all time.

Russell Carollo, of Mark Cuban’s JunketSleuth, has a great post up today about the way in which the FDIC aggressively rebuffs FOIA requests that other government agencies are happy to comply with. The FDIC has long been a hugely powerful and unaccountable arm of the government, and its letters to Carollo stink of arrogance and entitlement.

The FDIC repeatedly refused to provide any information on travel by its employees, claiming, among other things, that it has no central database, that Junketsleuth’s requests were too broad and that even if they had the information, the public wouldn’t have a right to see it…

Although the FDIC has rejected all of JunketSleuth’s Freedom of Information Act requests, more than 20 other agencies that got identically worded letters turned over their travel databases, which contain hundreds of thousands of records…

In addition, more than 30 agencies have provided JunketSleuth with other types of records. Those include hotel bills, airline receipts and other documents related to travel by top agency officials and other government employees, or to travel to specific destinations that we asked about.

But the FDIC provided nothing.

In response to JunketSleuth’s initial request for data, the FDIC claimed that our request – again, worded identically to those that yielded voluminous records from many other agencies – did not “reasonably describe” the information being sought.

The FDIC also said that we did not specify a time frame for the records we sought, suggesting that our request for data could be interpreted to mean all travel-related information compiled since the agency was created in 1933.

The FDIC seems perfectly happy to send responses to FOIA requests saying that it will provide no information at all on the grounds that the FOIA “could be construed to include” some impractically massive amount of information. It’s a textbook example of bad faith: what’s clearly happening here is that the FDIC has first decided that it’s not going to provide anything at all, and then instructed its lawyers to find some colorable reason why the request is being denied.

Why is it that the FDIC is being so willfully obstructive even as other agencies, including the Department of Defense and the FDA, are much more cooperative? The answer is surely the culture of secrecy and of we-know-best that pervades the financial sector generally, including the areas where it seeps into government. The Fed, of course, is just as bad, if not worse — it has a habit of dismissing FOIA requests out of hand, on the grounds that it’s not a government agency. (Technically, it’s a privately-owned corporation.)

Whenever information has emerged which Treasury or the Fed initially wanted to keep secret, the deleterious effects have been invisible — once again, the risk of something bad happening as a result of disclosure is an excuse used to justify a blanket decision not to disclose anything, rather than the reason for that decision. It’s worth remembering here that immediately before he was Treasury secretary, Tim Geithner ran the hugely secretive New York Fed, and did nothing to improve its transparency.

Government is, by its nature, a massive bureaucracy, and it’s very hard if not impossible to change an ingrained culture in such places. But a bit of top-down pressure could only help. Perhaps the White House could appoint an “openness czar” or similar to whom anybody getting serially rebuffed could appeal. Because this secrecy is ultimately self-defeating, not to mention politically damaging.

(Cross-posted at CJR)

As Dominique Strauss-Kahn continues his campaign-in-all-but-name for the French presidency, another Gallic technocrat, Pedro Pablo Kuczynski, is running for president of Peru. They have much more in common than the fact that they’re both commonly referred to by their initials — they both represent the old guard, the well-schooled elite, the ancien regime in a world where such regimes are crumbling by the hour.

PPK, whose full name is Pedro Pablo Kuczynski Godard, is the first cousin of Jean-Luc Godard and speaks French as well as, say, John Kerry. He’s a true global cosmopolitan, having spent much of his life globe-trotting on behalf of various Wall Street investment banks, including a decade as chairman of First Boston. He studied at Oxford with John Williamson, the inventor of the Washington Consensus, and they remain close; they co-edited a book in 2003. And, of course, he’s the father of Alex Kuczynski, she of the plastic-surgery book and hedge-fund manager husband and privileged articles which push the boundaries of what is socially acceptable even in New York, let alone Lima. He’s never been elected to anything, but noblesse oblige and all that.

The weird thing is that Peru doesn’t need PPK at all. Under leftist Alan García, Peru has performed stunningly well through the global financial crisis, growing at 8% in 2006, 9% in 2007, 10% in 2008, and then bouncing back to 9% growth in 2010 after modest-but-still-positive growth of 1% in the worst crisis year of 2009. Peru doesn’t need el gringo to provide what Eric Schmidt might call “day-to-day adult supervision”; in fact, it doesn’t need a 72-year-old president of any description when the median age is just 26.

PPK is a man of the past, a policy wonk who’s more interested in implementing policies than providing real leadership. DSK is not much different: both of them are former economy ministers who are naturally at home in Washington’s most rarefied circles and who can talk for hours about global macroeconomic imbalances or coordinated responses to systemically-important risk factors. Both of them, too, contributed more to the problem when it came to the financial crisis than they did to the solution.

It’s time to move on from these wise old men. France and Peru deserve presidents who will lead — someone much less lugubrious, much more vivacious, a creator of the 21st Century rather than a throwback to the 20th. The generation of DSK and PPK had its chance, and did what it could. It’s time for them to move aside and see what the generation of Obama and Cameron can do next.

I love Binya Appelbaum’s NYT article on the various different values of a human life which are used by government agencies to justify regulations.

The first thing to admire about the piece is that it doesn’t dwell on ethics or philosophy, as most such stories do — there are no rhetorical flights of fancy about the government trying to put a dollar value on love, or that kind of thing. Instead, Appelbaum goes on a tour of government agencies, looking at the numbers they’re using now, how those numbers differ from other agencies, and how they have changed over time:

The Food and Drug Administration declared that life was worth $7.9 million last year, up from $5 million in 2008, in proposing warning labels on cigarette packages featuring images of cancer victims…

The Bush administration rejected a plan in 2005 to make car companies double the roof strength of new vehicles, which it estimated might prevent 135 deaths in rollover accidents each year…

Last year, the Obama administration imposed the stricter and more expensive roof-strength standard, and it published a new set of calculations showing that the benefits outstripped the costs.

Most of the difference came from the increased value of human life. By raising that number to $6.1 million from a figure of $3.5 million in the original study, the Obama administration rendered those 135 lives — and hundreds of averted injuries — more valuable than the roofs…

Agencies are allowed to set their own numbers. The E.P.A. and the Transportation Department use numbers that are $3 million apart. The process generally involves experts, but the decisions ultimately are made by political appointees.

The Office of Management and Budget told agencies in 2004 that they should pick a number between $1 million and $10 million. That guidance remains in effect, although the office has more recently warned agencies that it would be difficult to justify the use of numbers under $5 million, two administration officials said.

This kind of behavior leaves the agencies open to charges of inconsistency and capriciousness: if at first you don’t succeed in making your cost-benefit calculation work, then just try again with an arbitrarily higher number for the benefits involved.

But I think that this is a case where the perfect is the enemy of the good. As Manchester University professor Robert Hahn notes in the article, “the reality is that politics frequently trumps economics”. That’s a fact of life. And in a world where political considerations are ultimately going to power many if not most decisions, using dollar values for lives saved is a good way of keeping such arguments grounded in reality.

Sure, businesses don’t like it when the FDA ups its value for a life saved by acetaminophen warning labels to $7 million from $5 million, and it’s entirely possible that the FDA changed the valuation only so that it could provide an official justification for a decision it had already made. The fact is, however, that these calculations are always messy at the best of times. It’s easy to point to the value-per-life part of the calculation, because that’s a hard number. But how on earth is the FDA meant to calculate the number of lives saved by adding a second warning label to acetaminophen bottles? The error bars there are going to be much bigger than the differences in value-per-life numbers.

In that context, a little bit of fuzziness in the $5 million to $10 million range seems entirely reasonable to me. It’s regulators’ job to make judgments, not to simply sit at a desk with a calculator and determine which of two numbers is larger. And at the same time it’s reasonable to ask regulators to justify their judgments using math. So sometimes they’ll use a slightly higher number, and sometimes it’ll be lower. Giving regulators a bit of wiggle room gives them the ability to do their jobs, while restricting that wiggle room allows a simple smell test to be applied.

None of this is exactly pretty, and it’s easy to see why Appelbaum couldn’t get straight answers out of the technocrats he talked to. But if anything the amount of wiggle room is smaller than I would think reasonable:

In December, the E.P.A. said it might set the value of preventing cancer deaths 50 percent higher than other deaths, because cancer kills slowly. A report last year financed by the Department of Homeland Security suggested that the value of preventing deaths from terrorism might be 100 percent higher than other deaths.

Both those numbers could and arguably should be significantly higher, I think. Dying of cancer is a particularly gruesome — and expensive — way to go. And the cost of the terrorist attacks of September 11 is well up in the trillions at this point — getting on for a billion dollars per initial life lost.

So color me impressed that the US government has found a way of getting things done and remaining empirical in an atmosphere which by its nature is always going to be highly political. It comes as no surprise that the Obama administration is using values higher than the Bush administration did — that’s part of what Obama meant when he promised to toughen up government regulation of corporations. I’m just happy that there’s a culture in Washington of basing these decisions on some kind of numerical argument.

(On which matter I have one quibble with Appelbaum’s piece. He says that if companies must pay lumberjacks an additional $1,000 a year to perform work that generally kills one in 1,000 workers, that would impute a $1 million value on a human life. I don’t think that’s true: you should take the present value of $1,000 per year before you multiply by 1,000. So the imputed value of human life here would be much higher than $1 million, depending on how long the average lumberjack works at his job.)

NYSE CEO Duncan Niederauer doesn’t speak German, despite the fact that he was a Grand Marshal in the 2008 German-American Steuben Parade of New York. So we at Reuters (with many thanks a certain very senior editor who shall remain nameless) thought we’d help him out with a few phrases which might come in handy:

English: Dick Grasso? Before my time, sorry.
German: Dick Grasso? Sorry, der war vor meiner Zeit.

English: Daimler-Chrysler? I don’t see any comparisons there.
German: Daimler Chrysler? Also den Vergleich kann ich wirklich nicht verstehen.

English: The New York Stock Exchange is the cradle of American capitalism. It is a national treasure.
German: Die New Yorker Börse ist die Wiege des amerikanischen Kapitalismus — ein nationales Heiligtum.

English: Just because we’re German doesn’t mean we’re intent on world domination.
German: Nur weil wir deutsch sind, heisst das noch lange nicht, dass wir die Welt dominieren wollen!

English: I, for one, welcome my new overlords.
German: Also ich, fuer meinen Teil, heisse meine neuen Chefs herzlich willkommen!

Further phrases are left as an exercise for the reader. A few to get you started: “This is a merger of equals, not a takeover”, “Chuck Schumer? He’s just a passing acquaintance”, “Flying commercial hurts productivity and is a major security risk”, “Greed, for lack of a better word, is good”, “Co-located algorithmic high-frequency traders are important liquidity providers and are fundamental to the efficient allocation of capital on modern electronic exchanges”.

The advantage of being pseudonymous is that you can be honest. Here’s TED:

The most egregious example was the time I had to fly 18 hours, on short notice, from a mid-sized European city to Beijing for a two-hour pitch and fly right back to London for business the next day. In terms of cost-effectiveness, best use of senior bankers’ time, and sheer expense, this was pretty ludicrous.

And here’s James Gorman, showing what bankers have to say if they’re speaking on the record:

I pitched for 450 client meetings last year. I flew to China for a 20-minute meeting and then got on a plane and flew back. It was right for me to do it, and we got the deal.

It’s conceivable that both are true. I’m pretty sure that TED was flying commercial while Gorman was flying privately. That makes a huge difference in terms of productivity, especially while airborne. On the other hand, Gorman’s logic is pretty flimsy. He seems to think that if Morgan Stanley got the deal, then flying to China was obviously the right thing for him to do. But in fact it’s a bit more complicated than that.

As TED notes, the expenses incurred on Gorman’s trip were pretty big. Cash costs of course were huge, but opportunity costs were larger still: there was surely a significant number of meetings that Gorman didn’t make because he was stuck on a plane going to or from China, where he could have added value for the firm. On top of that is the basic probabilistic calculation: what is the probability that Morgan Stanley would have got the deal had Gorman not travelled to China? And what are the chances that Morgan Stanley might have lost the deal even after Gorman showed up for his 20-minute meeting?

Then there’s a bigger question still: what are the chances that getting the deal is going to end up being a good thing for Morgan Stanley? John Hempton has a post today about Guanxi — the way that Chinese business deals are generally based on personal connections and relationships.

In the United States the Guanxi guys will work for single-digit millions annually and think they are well paid. That is all they are entitled to. Such limitations on entitlement do not exist in Asia – and the Guanxi guys are likely to see Western funded private equity shops like Carlyle as piggy banks to loot… And the looting will not be a million or two dollars here and there – it will be for every penny they can extract…

The whole point of private equity is that by pooling capital you can get insider positions and you can run the company for cash – for the benefit of your investors. But if your “insider position” doesn’t even allow you to spot the business does not exist then your insider status is worthless…

Only after the collapse of network capitalism will the system be cleaned up and capital be allocated on the basis of analysis rather than connections.

It’s possible that the deal Gorman flew to China for was a purely advisory one which didn’t use Morgan Stanley’s balance sheet at all. But I doubt it. And as a result, no one will know whether the deal was a good one for Morgan Stanley for many years yet. If the likes of Hempton and Jim Chanos are right, then in hindsight just about every flight to China these days could turn out, with hindsight, to have been a very bad idea indeed.

Well done to Lucy Kellaway for picking up on this classic bit of bankerbollocks from Morgan Stanley’s James Gorman:

WSJ: Why has fixed income been so tough to turn around?

Mr. Gorman: We have never had the kind of foreign-exchange business that the global [commercial] banks have had. And we’ve focused less on building pure flow, client-driven businesses where you need more people. We’ve reasserted our identity around those client businesses. What we’re doing strategically is going back to the future. It’s a sweet spot where we’re very comfortable.

This is almost the platonic ideal of the form. Gorman starts off by changing the subject — it’s far from clear why having a large FX business would make it easier to turn a fixed-income desk around — but then rapidly veers off into the kind of consultant-speak best measured in femtograms. (Gorman used to work for McKinsey.) The really hilarious thing, of course, if you take any of this stuff seriously at all, is the way that Morgan Stanley seems to be trying to reasserting its identity around the businesses where it hasn’t been focusing. But hey, so long as they’re comfortable in their back-to-the-future sweet spot.

The real answer to the question, of course, is “fixed income desks thrive by taking risk, we made a deliberate decision to derisk aggressively at the height of the financial crisis, and if you start seeing lots of profits from the fixed-income desk in future, you can probably assume we’ve learned nothing”. But that would require an honest CEO who speaks English. In reality, nobody with either trait would ever be considered for the job.

Ken Auletta, who literally wrote the book when it comes to Google, has a must-read take on what exactly is going on with Eric Schmidt, and goes out on a limb by saying that his tenure in the weird job of non-CEO executive chairman will last just one year before Schmidt leaves to “do something else.” (This fits with reports that Schmidt is planning to sell a chunk of Google stock.)

The era of Larry Page, CEO, is about to begin: it’s clearly what Page wants, but it’s also something that he’s temperamentally ill-suited to:

Larry Page, who read books on business as a young man, who at age twelve read a biography of Nikola Tesla and took away the lesson that it was not enough to be a brilliant scientist if you were not also a good businessman who controlled your inventions, had more aptitude for management than Sergey Brin. It was always assumed that one day Page would be C.E.O. Now that he is about to be, he will have to change. He is a very private man, who often in meetings looks down at his hand-held Android device, who is not a comfortable public speaker, who hates to have a regimented schedule, who thinks it is an inefficient use of his time to invest too much of it in meetings with journalists or analysts or governments. As C.E.O., the private man will have to become more public.

Looked at in this light, Schmidt’s year as executive chairman is essentially a way of softening the blow of being CEO: Schmidt will take on a lot of the responsibilities which Page is ill-suited to, at least for a while, giving Page some time to get his management ducks in a row before facing a lot of public music.

Meanwhile, YouGov BrandIndex sends over this chart, showing that the perceptions gap between Facebook and Google has never been narrower:

My suspicion is that it’s Sergei, rather than Larry, who’s going to be mostly responsible for keeping Google’s score as high as possible here, and tending the don’t-be-evil flame. He’s also going to be in charge of various undisclosed moves out of Google’s core advertising business, while Larry tries to bring more focus and drive to what has become a very large bureaucracy.

As for Eric, as Auletta says, he’s “fifty-five, a billionaire, a man comfortable in his own skin.” The option space available to him is enormous. But after spending his entire professional life working for other people, I suspect he’ll want to be the owner or founder of whatever he does next.

I love myself a brutal takedown, and Jason Linkins’s evisceration of Peter Baker’s big NYT Magazine story on Obama’s economic policy is a classic of the genre. Except, I have to admit to being Team Baker on this one. We’ve all read a lot of stories about the economy, and what bad shape it’s in, and how we got to this sorry place. This one’s different. It’s written by the NYT’s White House correspondent, and it raises an uncomfortable question: what if part of the problem is that Obama’s economic team just wasn’t a good team? What if, in fact, it turns out to have been a very bad team?

Baker points out that most of the original members of Obama’s economic team have left, and that the new guys are generally Clinton-era veterans. And given the reputation of the two presidents, you’d expect the Clinton bunch to be more fractious and chaotic than the No Drama Obama crew. But that turns out not to be the case:

The path from crisis to anemic recovery was marked by turmoil inside the White House. The economic team fractured repeatedly over philosophy (should jobs or deficits take priority?) and personality (who got to attend which meetings?), resulting in feuds that ultimately helped break it apart. The process felt like a treadmill, as one former official put it, with proposals sometimes debated for months before decisions were reached. The word commonly used by those involved is “dysfunctional,” and in recent months, most of the initial team has left or made plans to leave, including Larry Summers, Christina Romer, Peter Orszag, Rahm Emanuel and Paul Volcker.

Most of the blame here can and should be laid at the feet of Larry Summers — and, implictly, on Obama for hiring him in the first place. Summers is no manager, and seems to have been much better at getting into fights with people than at making sure everybody was doing their best to pull in the same direction. Baker rehearses the stories of Summers’s fights with Austan Goolsbee, with Christie Romer, and with Rahm Emanuel:

Summers and Emanuel also clashed over incentives for small business — the chief of staff kept demanding a proposal, but Summers opposed the idea of using TARP money for the initiative, arguing it would not be effective. It took months to develop a policy.

Baker even comes close to saying that Peter Orszag’s decision to take Citigroup’s millions was in part a function of his inability to get Summers to care about the budget — or, conversely, of Summers’s inability to credibly pretend to Orszag that he was being listened to:

One reason Orszag left, eventually winding up at Citigroup, was the sense that the administration was trapped in a dynamic that would make it hard to reduce the deficit adequately.

All this talk about being trapped in a dysfunctional team, of “picking through the wreckage of a messy divorce”, makes some sense, given the utter inability of Obama or anybody else to articulate a coherent vision of what the Obama administration’s economic policy actually is. Obama, writes Baker,

couldn’t seem to decide whether he was going to take Wall Street to task for its irresponsible behavior or cajole it into freeing up money to get the economy moving. One day he derided “fat-cat bankers” who caused the recession; another day, he soothed them by saying that he and the American people “don’t begrudge” multimillion-dollar bonuses.

Which is weird, given the clarity with which Obama was speaking before his economic team had the opportunity to fall apart.

Summers, of course, is being as slippery as ever:

As we talked for three hours that night, he struck me as thoughtful and analytical about what went right and what didn’t. He didn’t want to be quoted from that conversation, though, preferring to polish his thoughts with academic precision and e-mail them to me later. “We always believed that the greatest risk was doing too little, not to do too much,” he wrote. “We fought for the largest fiscal program we could get.”

Except, of course, that simply isn’t true:

Obama’s instinct was to take on everything at once. “I want to pull the band-aid off quickly, not delay the pain,” a senior Obama official remembers him saying. “He didn’t want to muddle through it, Japan-style,” recalled Larry Summers, tapped to be director of Obama’s National Economic Council. Romer calculated how much government spending would be needed to fill the gaping hole of consumer demand and came up with $1.2 trillion, the highest of three options. Summers told her to leave that number out of the memorandum to Obama.

At this point, the risk is that it’s too late to fix things. Obama no longer controls the House; neither can he count on 60 votes in the Senate for anything. And on top of that, he’s already two years into his administration. For Ken Rogoff, the course is set:

After two years, he said, the president has essentially done everything he can and must wait to see if it works. “What’s going to happen with unemployment and the economy is largely set at this point,” he said. “He’s taken his decisions, and now it will unfold and things will begin to improve.”

The problem is that the improvement will come fast for capital, and very slowly for labor; it’s unthinkable that Obama will run for re-election with a lower unemployment rate than when he ran for president.

The NYT is pairing Baker’s story with a group of photographs by Alec Soth entitled “Portraits From a Job-Starved City”. Linkins is right that these people don’t much care about technocratic squabbles inside the Beltway. But they elected a pro-labor, pro-union president — and got from him an economic policy which recapitalized banks and did wonders for the stock market, but which has massively underperformed on the job and foreclosure fronts. The buck stops with the president: he’s already taken his electoral lumps, and will face tough questions in 2012. But Baker makes an important case that a lot of the blame should be shouldered by Larry Summers, who should have cared much more about unemployment than he did, and who was in large part responsible for the incoherence of the most important arm of the Obama administration.

Peter Thiel’s hedge fund, Clarium Capital, ain’t doing so well. Its assets under management are down 90% from their peak, and total returns from the high point are -65%.

Thiel is smart, successful, rich, well-connected, and on top of all that his calls have actually been right:

In investor letters and interviews, some predating the global financial crisis, Thiel identified three broad economic bets he planned to let ride: 30-year U.S. Treasury bonds would rise as the U.S. economy slows and deflation sets in; the dollar would strengthen against the euro as investors scale back investments in emerging markets funded by borrowing dollars; and energy stocks would climb along with oil prices as production peaks.

None of that, clearly, was enough for Clarium to make money on its trades: the fund was undone by volatility and weakness in risk management.

There are a few lessons to learn here.

Firstly, just because someone is a Silicon Valley gazillionaire, or any kind of successful entrepreneur for that matter, doesn’t mean they should be trusted with other people’s money.

Secondly, being smart is a great way of getting in to a lot of trouble as an investor. In order to make money in the markets, you need a weird combination of arrogance and insecurity. Arrogance on its own is fatal, but it’s also endemic to people in Silicon Valley who are convinced that they’re rich because they’re smart, and that since they’re still smart, they can and will therefore get richer still.

Thirdly, getting big macro calls right is all well and good, but it’s as likely to lose you money as it is to make you money.

Fourthly, hedge funds need to hedge—or at the very least to put hard stop-losses in place when they enter into a trade.

And finally, if you invest for “the intellectual challenge” rather than to make lots of money, you’ll get what you wished for.

There’s a lesson here for hedge funds looking to pick up brainiacs like Larry Summers—another smart, arrogant, and well-connected person with big financial ambitions—when they exit the government’s revolving door. Summers made a hefty multi-million-dollar salary when he was at DE Shaw, but it’s worth remembering that when he was actually in charge of running money himself, he put Harvard into a series of disastrous interest-rate swaps which ended up losing the university $1 billion. If you want positive investment returns, rather than proximity to people with geek-celebrity status, the likes of Thiel and Summers are probably best avoided.

Justin Fox has a smart piece on the revolving door today. “There doesn’t have to be a problem with a revolving door between government jobs and non-government jobs,” he writes, and indeed the movement back and forth between the public and the private sector “has for most of the nation’s history been more strength than weakness.” The problem, he says, is specific to Wall Street, which pays so much better than any other area of the economy.

With that kind of pay differential, Wall Street inevitably begins to emit a giant sucking sound as it hoovers up smart, self-interested people. This is apparent at top business schools, in physics Ph.D programs — and in Washington, where smart out-of-office (or just burned-out) government officials who want to secure their family’s financial future before either retiring or heading back into public service now flock to Wall Street jobs. Larry Summers did. Rahm Emanuel did too. John Snow did. Bill Daley did. Phil Gramm did. Harold Ford Jr. did. Peter Orszag is doing it. Heck, I’d probably do it if I were in their shoes. Gene Sperling, to be fair, didn’t go so far as to become a banker. But on the whole, if you believe that people respond to economic incentives, you have to believe that Wall Street’s artificially high pay scales have come to have a big impact on decisionmaking in Washington — and that this is an unhealthy development for our democracy and our economy. So making a stink over Sperling’s Goldman paychecks is, under the circumstances, a perfectly appropriate thing to do.

It is is also, of course, a mostly ineffectual thing to do. He’s got the job. But now that he’s got it, maybe he should try to figure out what to do about the chasm between Wall Street pay and compensation in the rest of the economy.

But there’s the rub. Government is perfectly capable, were it so inclined, of shrinking the financial sector and making it much less profitable. Banks could become highly-regulated utilities, bonus culture could be eradicated, hedge funds would no longer be exempt from SEC rules about transparency and investor protection, private-equity honchos would have to pay income tax on their income, leverage would be discouraged in the tax code by eradicating the tax-deductibility of interest, and so on and so forth. The economy might lose a bit of possible debt-fueled upside, but it would be much less fragile and much less prone to banking crises.

If that happened, then the huge gap between what people earn on Wall Street and what they earn everywhere else would disappear: we’d be back in the 1970s, essentially, when the best and brightest went into all manner of different industries.

But it’s not going to happen, because the public servants who could enact such a change currently have the ability to earn millions of dollars per year when they leave DC. Government work pays well, but not that well. The real value of a government position, especially in the economic team, is in the marginal net present value of all those juicy future earnings that you’ll be offered upon your departure from the administration. And so any reforms aimed at shrinking the financial sector would do massive damage to the economic health of the reformers themselves. And those reformers are wonks, remember: precisely the kind of people who consider probability-weighted future earnings to be genuinely valuable things.

In that sense, the revolving door is arguably less distasteful when it swings the other way, from Wall Street to Washington. People like Hank Paulson or Bill Daley have already made their Wall Street millions, and so the marginal net present value, to them, of taking a government job is probably negative. The problem in these cases is that after so many years on Wall Street these people have internalized the worldview of the financial sector, where banks create value and bonuses are great and what’s good for Goldman Sachs is good for America. They’re not going to gut the very system which was so good to them. (Although in rare cases they’ll tinker at the margin, as Gary Gensler is doing at the CFTC.)

One solution here, I think, is to radically reduce the number of political appointees in the economic team. It’s impossible to have a successful career at Treasury or the NEC, because all the top jobs are political: when the president changes, especially when there’s a change of party, all the old appointees get kicked out. As such, every senior appointee is always going to have, in the back of their head, the question of what they might do next. It’s not a question we really want them to have, since right now Wall Street is always going to be on everybody’s shortlist.

It now seems all but certain that Gene Sperling is going to get Larry Summers’s (and his own) old job at the NEC. And David Corn has a long piece in Mother Jones defending the choice. (He’s not the only person to have this idea: Jacob Weisberg has a similar column.) I’ve said my piece about Sperling; there’s no point relitigating this. But it’s fascinating to see how Corn reports on the institutionalization of the revolving door between Wall Street and Washington, to the point where taking $887,727 from Goldman Sachs is positively self-abnegatory:

After the Clinton administration ended in 2001, Sperling, according to a former Clinton administration aide, spoke to several “wise men” about what he should do next. As a former NEC director, he was in great spot to cash in. And he received the same career advice from all of these counselors: go to Wall Street for the next eight years, make millions, and then return to public service (when there might be a Democratic president). He didn’t follow this guidance. Instead, Sperling devoted most of his time to addressing the challenge of global poverty…

A friend of Sperling adds, “After having been head of the NEC for Clinton, he could have immediately gone to Wall Street and made a lot of money. That’s what most people in his situation do. But he didn’t. A lot of us who know him scratched our heads about that.” …

At some point, according to a source familiar with the episode, Goldman Sachs approached Sperling for advice on globalization… On the advice of friends, he requested that he be paid what the investment firm might pay a top lawyer or dealmaker: $70,000 a month.

Corn never identifies the “friends” and “wise men” who sagely intoned, when asked for their opinion, that Sperling should go off and make millions of dollars. But it’s easy to guess that Rubin and Summers were among them — not least because they, too, did exactly the same thing upon leaving the Clinton administration.

If the revolving door is really as institutionalized as Corn says that it is, that’s a very serious problem — and all the more so for the fact that people like Weisberg try to paint it as a positively good thing:

I suppose that in a perfect world, officials would be members of a flagellant order, coming to Washington from their monastic cells and reaffirming their vows of poverty afterward. But that wouldn’t work, either, because economic policymakers would have no feel for markets, business, or life in the real world.

It’s worth pushing back against this notion that earning a seven-figure sum on Wall Street automatically gives you a feel for markets and business — or even that in order to have a feel for markets and business, you have to earn a seven-figure sum on Wall Street. Neither is true. Advising Goldman Sachs on setting up a charitable foundation might teach people a lot about how to navigate the internal politics of Goldman Sachs, but that’s about it. And while there are certainly many highly-remunerated bankers who do know a lot about markets and business, there are equally many who don’t. Wall Street jobs tend to be hyper-specialized: a detailed knowledge of, say, the custody trail in reverse repo transactions is highly unlikely to give you any insight into the state of the US economy.

As the testimony at the FCIC from the Goldman executives involved in the Abacus transaction shows, bankers tend to live in a highly distorted reality where the outrageous is accepted as a normal and ethical way of conducting business: insofar as working on Wall Street does give people a feel for how business is conducted, it can give people a very distorted impression indeed. Like, for instance, the impression that an annual income of $2.2 million is head-scratchingly low, rather than mind-blowingly high.

In April 2006, Robert Rubin and Roger Altman launched the Hamilton Project under the aegis of the Brookings Institution. The aim, broadly, was to push the kind of fiscally-conservative liberalism beloved on Wall Street: Rubinomics.

At the time, New York Observer columnist Michael Thomas sent Altman the letter I’ve embedded below; it makes for hugely enjoyable reading. Thomas sent it to me after reading my post yesterday on Altman and the other members of the shortlist to replace Larry Summers; I have to admit I’d forgotten just how close Rubin and Altman were. The whole letter is well worth reading, but here are a few juicy extracts:

What I read prompts me now to write to urge that you and your colleagues in this amazingly self-congratulatory undertaking cease and desist…

There are no new ideas in the statement. “Economic security and economic growth can be mutually reinforcing” is not a new idea, nor is any to be found in the page-long gloss that follows the enunciation of this bold new “principle.” If I may paraphrase Churchill’s well-known apothegm on the late Soviet Union, what we have here is platitude wrapped in cliché inside bromide – over and over and over.

Thomas then launches into a wonderful breakdown of the Hamilton Project’s advisory council: 12 Wall Streeters, 10 academics, 2 think-tankers, a publisher, and a management consultant. “At a time when enterprises like General Motors and Ford are back to wall,” he writes, “one might have thought some representation from the ‘make and do and hire and fire’ sectors of American commerce would have proved helpful, even insightful.” He then continues:

The sad truth seems to be, at least in the eyes of one who has spent enough time at the Four Seasons to have a sense of how this stuff works, that this really isn’t a program about helping the less-advantaged or getting the country straightened out in a fiscal and intellectual sense, this is an advertisement for a government-in-waiting.

This was highly prescient. The Hamilton Project’s first director was Peter Orszag, its second was Jason Furman, and its third was Doug Elmendorf. All three went on to high-profile roles in the very first Democratic administration to be put together after the Hamilton Project was founded.

If Obama chooses Roger Altman to replace Rubin’s former deputy Larry Summers, it will be clear that Rubin continues to have an intellectual chokehold on the White House — even after the financial crisis showed just how dangerous Rubin’s Wall Street-inflected worldview can prove to be in reality.

Altman

Chrystia Freeland has a long essay in the Atlantic on the new global elite, which will eventually become her next book. It’s well timed to coincide with the self-congratulatory plutocratic gabfest that is Davos, which kicks off in three weeks’ time, and with which Chrystia is very familiar.

The difference between the new global elite and the old global elite is that today the world is owned and run largely by first- or second-generation money: people who tend to think that they’ve earned it, somehow, especially if they came to their wealth from a background in the lower-middle classes:

While you might imagine that such backgrounds would make plutocrats especially sympathetic to those who are struggling, the opposite is often true. For the super-elite, a sense of meritocratic achievement can inspire high self-regard, and that self-regard—especially when compounded by their isolation among like-minded peers—can lead to obliviousness and indifference to the suffering of others…

When I asked one of Wall Street’s most successful investment-bank CEOs if he felt guilty for his firm’s role in creating the financial crisis, he told me with evident sincerity that he did not. The real culprit, he explained, was his feckless cousin, who owned three cars and a home he could not afford. One of America’s top hedge-fund managers made a near-identical case to me—though this time the offenders were his in-laws and their subprime mortgage. And a private-equity baron who divides his time between New York and Palm Beach pinned blame for the collapse on a favorite golf caddy in Arizona, who had bought three condos as investment properties at the height of the bubble.

It’s not that these people are utterly bereft of noblesse oblige: Chrystia points out that “in this age of elites who delight in such phrases as outside the box and killer app, arguably the most coveted status symbol isn’t a yacht, a racehorse, or a knighthood; it’s a philanthropic foundation.” But those philanthropies don’t benefit the left-behind middle classes: they tend to follow a barbell distribution, with the money going either to the world’s poorest or else to well-endowed universities and cultural institutions. The US middle class is sneered at for being fat and lazy and unworthy of their wealth:

The U.S.-based CEO of one of the world’s largest hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter. “His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade,” the CEO recalled.

I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”

This mindset is dangerous, but it’s not clear how dangerous it is.

The real threat facing the super-elite, at home and abroad, isn’t modestly higher taxes, but rather the possibility that inchoate public rage could cohere into a more concrete populist agenda—that, for instance, middle-class Americans could conclude that the world economy isn’t working for them and decide that protectionism or truly punitive taxation is preferable to incremental measures such as the eventual repeal of the upper-bracket Bush tax cuts.

Mohamed El-Erian, the Pimco CEO, is a model member of the super-elite. But he is also a man whose father grew up in rural Egypt, and he has studied nations where the gaps between the rich and the poor have had violent resolutions. “For successful people to say the challenges faced by the lower end of the income distribution aren’t relevant to them is shortsighted,” he told me. Noting that “global labor and capital are doing better than their strictly national counterparts” in most Western industrialized nations, ElErian added, “I think this will lead to increasingly inward-looking social and political conditions. I worry that we risk ending up with very insular policies that will not do well in a global world. One of the big surprises of 2010 is that the protectionist dog didn’t bark. But that will come under pressure.”

If this is true, then the members of the super-elite should be falling over each other to pay more in taxes out of simple enlightened self-interest—rather than saying that a perfectly sensible tax hike is “like when Hitler invaded Poland in 1939.”

But it seems to me that the inchoate anger of the masses shows no sign of cohering into anything at all, let alone protectionism, which seems to have been dying a slow death ever since the protests against Nafta. The Tea Party, which is the closest thing we have to a populist revolt, is bought and paid for by plutocrats and shows no protectionist tendencies whatsoever. If they keep on going on their present trajectory, they’re just as likely to continue unimpeded as they are to run into some kind of atavistic class warfare.

So I’m unconvinced that the plutocrats have any real incentive to restrain themselves, or to stop moaning around an Upper East Side dinner table that $20 million a year isn’t all that much—it’s really only $10 million a year, after taxes.

And I’m also unconvinced that we actually need the plutocrats as much as Chrystia says we do:

Not all plutocrats, of course, are created equal. Apple’s visionary Steve Jobs is neither the moral nor the economic equivalent of the Russian oligarchs who made their fortunes by brazenly seizing their country’s natural resources. And while the benefits of the past decade’s financial “innovations” are, as Volcker noted, very much in question, many plutocratic fortunes—especially in the technology sector—have been built on advances that have broadly benefited the nation and the world. That is why, even as the TARP-recipient bankers have become objects of widespread anger, figures such as Jobs, Bill Gates, and Warren Buffett remain heroes.

And, ultimately, that is the dilemma: America really does need many of its plutocrats. We benefit from the goods they produce and the jobs they create. And even if a growing portion of those jobs are overseas, it is better to be the home of these innovators—native and immigrant alike—than not. In today’s hypercompetitive global environment, we need a creative, dynamic super-elite more than ever.

I would put this another way. The Silicon Valley mega-wealthy are good for the US economy, but they’re not going anywhere: Silicon Valley hasn’t managed to reproduce itself elsewhere in the US, let alone anywhere else in the world. When it comes to US plutocrats, however, most of them are very similar to the Russian oligarchs who seized their country’s natural resources — they’re bankers and hedge-fund managers who seized their country’s financial resources. They produced no goods, and they created no jobs — quite the opposite. And so it makes sense for Americans who have lost their jobs and their hope to reclaim those financial resources, through mechanisms like a wealth tax or a financial transactions tax. The Silicon Valley elite would happily pay such things. And if the angry bankers went off to destabilize some other financial system, they wouldn’t actually be missed.

Brad DeLong has an excellent response to my post this morning about Larry Summers’s replacement at the NEC. Brad is open about being a Rubinite himself, and in truth he does a much better job of defending Rubin than Rubin’s biographer Jacob Weisberg did back in May. (On the other hand, since he’s concentrating on today’s post, he ignores the long list of substantive reasons why Rubin is particularly culpable in the financial crisis.)

Brad judges Rubin qua politician, nothing that he made the tax system more progressive, spent many years “raising lots and lots of $$$$$$$ for Democratic and progressive causes,” and was “squarely in the middle of the Democratic senatorial caucus.”

Brad doesn’t say that Rubin moved the Democratic party broadly to the right, and specifically towards the monied classes (a/k/a the bond vigilantes) who care about fiscal prudence and who make millions of dollars a year on Wall Street. Whether or not that was the correct thing to do from a policy point of view, it effectively neutralized any potential opposition to the people Brad really blames, especially Phil Gramm. It’s true that Gramm went further than Rubin or even Summers was willing to go. But it’s also true that insofar as there was concerted opposition to Gramm, the debates seemed highly technical and recondite, since at first glance everybody wanted pretty much exactly the same thing.

More generally, Brad’s take on Rubin sounds a bit like Ezra Klein on Gene Sperling, when he says that Sperling’s advantages include “extended experience in politics, including during a previous period when a Democratic president had to negotiate with a Republican Congress.”

Brad goes on to describe the search for Summers’s successor in explicitly party-political terms:

I would say that you want to draw your White House staff from successful managers–people who have had lots of experience bossing other people and who have done very well at it–and that there are only three groups of successful managers who are Democrats: Hollywood studio executives and their ilk, people who have made careers in government and academia, and executives who have worked for traditionally-Jewish investment banks. If you want managers in a Democratic administration, that’s where they have to come from. And I don’t think you want to throw out a third of your potential talent pool at the very start.

It’s worse than that, actually: my point was that the people who have made careers in government and academia—people like Richard Levin, or Larry Summers, or Peter Orszag—are also very much part of the Wall Street money culture, and invariably end up earning quite a lot from bankers, one way or another. So if you’re confining yourself to Brad’s three groups, and if you want to exclude the taint of Wall Street, then you’re left with Hollywood studio executives. Yikes.

On the other hand, if it’s really true that the only successful managers who are Democrats fall into one of Brad’s three groups, then the Democrats have much bigger problems than working out who the next head of the NEC should be. I don’t think it is true: I think that America is full of successful Democrats in flyover states. But also, I don’t think that it’s necessary or even particularly desirable that the next head of the NEC should be a wizened political strategist or, for that matter, a Democrat. Better that it’s someone who has seen at first hand how the economy works in America, by creating real value rather than living parasitically on those who do. And one thing that most politicians, academics, and bankers have in common is that they are fundamentally parasitical creatures.