Reuters Investigates
Insight and investigations from our expert reporters
Ethics in economics? Who cares?
Back in December, a Reuters investigation examined the ties between economists who testify to Congress on financial regulation and big financial institutions.
A Reuters review of 96 testimonies given by 82 academics to the Senate Banking Committee and the House Financial Services Committee between late 2008 and early 2010 — as lawmakers debated the biggest overhaul of financial regulation since the 1930s — found no clear standard for disclosure.
In fact, roughly a third did not reveal their financial affiliations in their testimonies, based on a comparison of the text of their testimonies available on the Congressional committees’ websites with their resumes available online.
Similar issues had been raised in the 2010 documentary “Inside Job” which vilified a number of big-name economists for arguing in favor of deregulation while on Wall Street’s payroll.
In response to the widespread criticism, the American Economic Association earlier this year charged a five-person panel with looking into ethics and economics. The panel, chaired by Nobel prize-winning economist Robert Solow, asked for input from the broader membership, with an end of June deadline, but so far, Solow said, he has received at most a dozen responses.
Read today’s follow-up story “Economists display little interest in ethics code” by Kristina Cooke and Emily Flitter here.
Below, watch a clip from “Inside Job” featuring Frederic Mishkin, a former governor of the influential Federal Reserve Board in Washington, who discusses a glowing paper he wrote about Iceland’s financial system in 2006 — for which he was paid by the Icelandic Chamber of Commerce.
Jamie Dimon: Good banker? Bad banker?
The U.S. mortgage business is a “mess” in need of overhaul, JPMorgan Chief Executive Jamie Dimon reckons.
(See our special report on Dimon today: “Jamie Dimon wants some R-E-S-P-E-C-T”)
Of course, his own bank is the third-largest U.S. mortgage lender. And JPMorgan is sitting on billions in not just prime mortgages, but risky home-equity loans too.
But Dimon has made a career out of being the one Wall Street banker who likes to stand up, stick up for his views and tell it as he sees it. He can talk in a way that resonates with the mood of the country. He can cross the divide between Wall Street and Washington D.C. And while his peers might talk about doing God’s work, Dimon will admit making mistakes.
The thing is, when you scratch the surface at JPMorgan, the bank doesn’t seem so different from its peers, with large consumer loan exposure and sometimes questionable business decisions. So what do you think? Does Dimon deserve your R-E-S-P-E-C-T?
Find the special report by Elinor Comlay and Matthew Goldstein in multimedia PDF format here.
Riddle me this, Batman: How can there be so many copies of the Greek Classics now in circulation, and so shallow a grasp of the concept of hubris?
Let’s be ethical, economists say
Last month’s special report “For some professors, disclosure is academic” has been making waves in the academic world, as this story shows:
Economists urge AEA to adopt ethics code: letter
NEW YORK (Reuters) – Almost three hundred economists have signed a letter to the American Economic Association “strongly” urging it to adopt a code of ethics requiring disclosure of potential conflicts of interests.
The 135-year-old American Economic Association, or AEA, does not have a code of conduct for its approximately 18,000 members. Over half of its members are academics, according to its website.
“We strongly urge that the AEA create and then promote adherence to a professional code of ethics that at a minimum requires transparency with respect to potential conflicts of interest,” Gerald Epstein and Jessica Carrick-Hagenbarth of the University of Massachussetts, Amherst wrote in a letter sent Monday to the AEA.
“We believe this would be an important and necessary step toward enhancing the credibility and integrity of the profession,” they wrote.
Please, no more drunks, tax evaders and womanizers in leadership-she can’t take anymore! Let em move to sin city where they’ll fit right in! Also, free internet porn for kids at a push of a button should produce big/expesnive sociall ills in no time!
Flash crash fallout
From Europe to India, policymakers are grappling with the fallout from the harrowing, 20-minute stock market meltdown in May that was quickly dubbed the “flash crash”. Electronic markets are suddenly suspect. But will regulators try to reign in modern trading advances?
Jonathan Spicer examines the likely impact on exchanges around the world in our latest special report: “Globally, the flash crash is no flash in the pan.”
Club Fed: the ties that bind at the Fed
We’re getting a lot of good feedback on our special report on cozy ties between Wall Street and the Fed. As one Wall Street economist put it: “I’ve never seen the ‘Fed Alumni Association’ used more extensively for back-channel communications with the Street than has been the case since June.”
The story pulls back the veil on the privileged access that Federal Reserve officials give to big investors, former Fed officials, money market advisers and hedge funds.
Another economist from a European bank thanked us for the report, saying: “I hate the idea that monetary policy is communicated through non-official channels, be it old friends or newsprint.”
Personally, I’d argue that if it comes via the press, at least the information is available to everybody in the market at the same time, but then a journalist would say that.
For a printable version in PDF format, click here.
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Author Profile
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There are three things that drive a lack of ethics in economics:
1) Neoclassical economics is not Positive but Normative only. It does not consider what should be, but only how the economy seems to work. This produces economists that are less concerned with ethical questions, because there is no single standard for what is ethical in economics.
Is it ethical for a central bank to inflate, or engage in quantitative easing? Is it ethical for a government to run deficits? Is it ethical for a government to create social programs that will burden future generations disproportionately? Neoclassical economics offers no answers.
2) Academic economists have a need to publish in order to get tenure. This leads to substandard research where data is tortured to reach conclusions, or advanced math is applied in obscure ways to generate unusual findings that are at variance with common sense. They create fake worlds where their policy conclusions are valid, and pretend that our far more complicated world is like the fake world.
3) Economists need to make money using a flexible discipline, so as consultants they can justify the answer needed by the businessman. Consider the cost of capital. I have lost consulting engagements telling clients that their cost of capital is too low. But with Modern Portfolio Theory, you can justify almost any cost of capital if you are clever enough. It’s a fake world that bears little resemblance to the way real capital markets work — but it is standard theory… who cares whether it works or not?
The only thing that has changed for economists since the crisis is that a few of the younger ones see the need to reflect real financial markets in their models, but they are in the minority.
The economics profession needs wholesale change, first realizing that the application of advanced mathematics to the economy has not worked, and that we need to go back to studying economic history, and think more broadly about economics — give up the idea that physics-type mathematics has any relevance, and think more in terms of economies as ecologies. Economics should be more of a qualitative discipline, and recognized for the art that it is, rather than the science that it could never be.