Open Comment To Simon Johnson

FYI. I posted this comment on Simon Johnson’s blog this afternoon. He had advocated, among many things, a wholesale changing of the guard in bank boardrooms.

“Not to annoy anyone, but:

Where do we get the new and presumably better directors? Who are they? And who are the new managers? Where will they come from?

Simon you are correct to say board oversight was a problem. Let’s dump the boards. But it is far too easy to glide lightly past the practical and obvious questions. We will need more managers in a system with more and smaller banks. We will need qualified regulators. We need better educated legislators. Where is the improved education going to come from? MIT?

Of course I’m biased, being an ex-banker myself, but I think we should focus on the practical as well as the fun of bank bashing.

The expansion of the derivatives business which is the heart of our problem was enabled by years of education at places like your own school Simon. Those ‘quants’ came equipped with economics PhD’s, many from MIT. So as we sweep up the elites and send them packing, do we include the economics profession? Do we need to take a look at the oversight of the curricula at our top universities?

I realize this sounds a tad whining, but when I read some of the comments your blog elicits I feel impelled to point out that there are quite a few Nobel prize winners who’s work enabled the derivative business to be what it became. The yahoo’s at Goldman Sachs etc. thought they were acting on solid theory. Sure they were motivated by huge and wrongheaded incentives, but their managers thought the risks were safe. Why? Because the Nobel prize winners said so.

This is a failure of ideas as well as of ethics. We should all, economists as well, look at ourselves as we try to find solutions.”