Open Letter To Josh Marshall At TPM Media

OK. I was angry this morning. In fact I have been brewing for a while. The vitriol about the ‘insiders’ and ‘oligarchs’ in banking who are plundering the economy has got to stop. TPM Media is a very well regarded blog site. But the folks there have gone nuts. Reporting is one thing. Instigating populist nonsense is another. This is what I wrote to Josh Marshall TPM’s publisher this morning:

“Josh:

I am surprised you propagate the sensationalism of [Professor] Johnson’s usage of the word oligarchs. It is misleading to say the least. Throwing around such terms is designed presumably to stir up argument so let me dive in:

First: from my personal and lengthy experience in banking there are no oligarchs. None. If Professor Johnson disagrees ask him to name someone.

Second: I do not believe for an instant that there is some small group of elitists plotting to plunder America. The word oligarchs suggests there is. Again name them. Spreading that meme only raises the temperature of the populist voice. It solves nothing and gets in the way of doing something practical.

That’s far too simplistic. The system sprawls across a vast number of firms both public and private sometimes with very little in common.
Fourth: but to continue with your nomenclature, the ‘banks’ screwed up big time. This wasn’t robbery. It was incompetence. Bureaucratic incompetence.

Fifth: the source of this incompetence is clear. The managers and employees of these ‘banks’ were executing strategies based upon a set of ideas. Those ideas were sourced directly from modern financial economic theory. Yes the execution was flawed in some cases. But in most cases the execution was perfect. It was the theory that failed. Bureaucrats execute, the CEO’s we all are currently denigrating are nothing but over sized bureaucrats. To unravel the root cause of our crisis we need to follow the string a little deeper. What did the bureaucrats think they were doing? Where did they get their ideas?

Your interviews with Joe Stiglitz and Johnson betray the root cause of our problem. Neither of them was asked the pertinent series of questions: how come the derivatives market grew so quickly and uncontrollably over the past twenty years? Is it merely coincidence that during that same time financial economic theory developed models of derivatives that allowed ‘proper’ pricing? Is it merely coincidence that every single ‘bank’ ran its portfolio precisely according to those models? Where did all those PhD’s [the ‘quants’ of Wall Street] get their educations? Hint: MIT; Harvard; Columbia: Wharton; Stanford; Chicago etc [I will leave out Princeton as a nod to Paul Krugman]

If Professor Johnson, for whom I have a very high regard, truly wants to root out the ‘oligarchs’ perhaps all he needs to do is pop across the floor at MIT. Most of the financial economic theory that enabled the explosion in the derivatives markets was developed right next door to him! They have the Nobel prizes to prove it.

This is not a failure of a few nefarious money hungry ‘oligarchs’, it is failure of an entire intellectual elite. It may be that Stiglitz and Johnson are not personally involved in the teaching of financial economics; but they surely are aware of the curriculum. If they have problems with it then stop it. Passive ignorance or extending professional courtesy to fellow academics is an evasion of responsibility for the discipline within which they work.

I suppose what angers me most about the commentary on your site and the glib nature of the analysis being put forward by guys like Stiglitz and Johnson is that it elides the wider responsibility. Everyone can see the fractured nature of economic theory: interview Barra at Harvard instead of Stiglitz. Or Fama in Chicago and you will get a totally and diametrically opposed view of what the right policy is from your interviews with Krugman, DeLong, or Baker. But that’s plain old macroeconomic theory. In contrast financial economic theory is a homogenous whole. There is no alternative.

Accusing incompetent bureaucrats of being oligarchs reminds me of Soviet era show trials when the five year plan failed. You trot out the disheveled department heads and blame them. Yes they’re fools. But thinking they’re the root of our problem misses the huge point: our ideas failed us. The entire system needs a makeover. Yes there are a few economists who are giving us leadership. And yes I have no doubt about the integrity of Stiglitz and Johnson. But it is gratuitous for them to disown their share of the problem. While we are all enjoying watching the spectacle of the public humiliation of the ‘bankers’ are we also preparing to question Professors Black, Shcoles, Merton et al also? [I believe Professor Black unfortunately is dead!]. To complete the cleansing that’s what we need to do. I realize attacking intellectuals with vastly impressive resumes is intimidating. But it’s the right place to start. Here’s an opening question: “What did economics learn from the LTCM debacle a decade ago?” Anything?

Regards,

Peter”

I doubt he’ll reply.