After Finance
I think Fareed Zakaria’s efforts to look on the bright side of the economic crisis probably go too far, but I certainly agree with this point:
The financial industry itself is likely to shrink, and that’s not a bad thing, either. It has ballooned dramatically in size. Curry points out that “30 percent of S&P 500 profits last year were earned by financial firms, and U.S. consumers were spending $800 billion more than they earned every year. As a result, most of our top math Ph.D.s were being pulled into nonproductive financial engineering instead of biotech research and fuel technology. Capital expenditures went into retail construction instead of critical infrastructure.” The crisis will stop the misallocation of human and financial resources and redirect them in more-productive ways. If some of the smart people now on Wall Street end up building better models of energy usage and efficiency, that would be a net gain for the economy.
Indeed. I mean, in principle taking a large proportion of quantitatively skilled people and having them apply their technical chops to the financial markets could be a good thing if doing so ushered in an exciting new era of genuinely superior financial wizardry. But instead, Keynes observation that “The game of professional investment is intolerably boring and over-exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll” seems just as true today as it was two or eight decades ago. Meanwhile, smart scientists and engineers are still producing useful stuff.
60 Responses to “After Finance”
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October 12th, 2008 at 6:26 pm
I think your ‘Wall Street’ graphic is likely to shrink, too.
October 12th, 2008 at 6:48 pm
Yeah, might wanna fix that graphic, Matt. It’s a bit messed up.
October 12th, 2008 at 6:57 pm
This assumes that there are any. That’s an assumption that I’m not willing to make and never have been.
October 12th, 2008 at 6:58 pm
This blog just got a lot more extreme.
October 12th, 2008 at 7:06 pm
Spoken like someone that doesn’t know a damn thing about finance or the financial markets.
October 12th, 2008 at 7:15 pm
Which suggests that… Obama ought to heavily tax the profits on this non-productive investing in order to compel the super rich to invest in domestic industry. What’s the down side? Certainly not that competition in a free market is hindered…
October 12th, 2008 at 7:21 pm
This assumes that there are any. That’s an assumption that I’m not willing to make and never have been.
There are. There are people that moved out of physics and higher math to work for Wall St. These are not stupid people, that wasn’t the problem. They looked at the whole system as a math model, and the system they are looking at is created by regulators. They were told to make a bunch of money and they did that. As far as they are concerned, it’s the fault of the model maker and not theirs for using it.
October 12th, 2008 at 7:29 pm
As far as they are concerned, it’s the fault of the model maker and not theirs for using it.
I think your assumption that “regulators” set everything up and the current failure belongs to them is highly suspect, but in any case, the above statement hardly supports the contention that quants who came from physics and math programs are smart.
October 12th, 2008 at 7:32 pm
Science and engineering are unrewarding jobs, considering the time and effort that goes into learning them. Of course, we’re supposed to enjoy our work for the sake of it, but that’s not an incentive to attract enough smart people who have even a moderate amount of self-interest.
Getting a Ph.D. takes anywhere between 4 to 8 years, during which time you’ll earn about $15,000 per year. Once you get your Ph.D., you’ll earn about $100,000. After that, salaries in the technical track top out around $150,000.
As far as engineering goes, even a four-year degree is a risky investment when jobs can be outsourced.
If this country thinks a Manhattan Project in energy independence is required, it will have to provide institutions and good-paying careers so that there’s a market for scientists and engineers.
I’ve worked as a government scientist and also as a start-up engineer. I can tell you that neither track is sufficiently enticing today to make college kids want to join them.
October 12th, 2008 at 8:11 pm
I’m one of those people with a quantitative degree that went into finance, I couldn’t agree more with Matt. I’m a parasite, and the sooner I can’t make a living at this, the better off the economy will be.
All I’d ask is that you allow me to finish getting my certificate in database management before you make me obsolete.
October 12th, 2008 at 8:16 pm
Finance is the art of passing money from hand to hand until it disappears. Murray Kempton, I think
Which is why it’s best practiced using other peoples money.
The giants of the just ended age of Wall Street finance, the Paulson’s and Fuld’s, who not coincidentally look like death itself, are properly called pigmen. Nothing was ever too much for them. They should always be mentioned in terms dripping with contempt.
October 12th, 2008 at 8:25 pm
…most of our top math Ph.D.s were being pulled into nonproductive financial engineering instead of biotech research and fuel technology.
No. Most of our top math Ph.D.’s go on to be math professors.
October 12th, 2008 at 8:33 pm
And some top math professors become incredibly successful hedge fund managers: http://en.wikipedia.org/wiki/James_Harris_Simons
October 12th, 2008 at 8:39 pm
As far as engineering goes, even a four-year degree is a risky investment when jobs can be outsourced.
Interesting … the conventional wisdom, at least in the blogosphere, is that an engineering degree is a Guaranteed Sure Thing, allowing one to enjoy an affluent lifestyle even as the liberal arts grads flip burgers.
October 12th, 2008 at 8:39 pm
No. Most of our top math Ph.D.’s go on to be math professors.
What Matt meant to say (or should have said) is: many of our top math/eco/phys students ended up working in banks because the bonuses were so insanely high. They didn’t even bother with a PhD or a MBA.
October 12th, 2008 at 8:42 pm
Oops… And by “Matt” I meant “Fareed Zakaria” of course.
October 12th, 2008 at 8:56 pm
Actually, our best mathematics academics go on to help the FBI solve crimes using math via quick CGI-enhanced summary explanations.
October 12th, 2008 at 9:06 pm
I’ve worked as a government scientist and also as a start-up engineer. I can tell you that neither track is sufficiently enticing today to make college kids want to join them.
It’s not that neither track is economically enticing enough– the pay is good as far as jobs go, and plenty of Americans would salivate over those salaries. The difference is that for the amount of academic and professional effort required, you could make an order of magnitude more money– not a small increase, but a huge increase in salary. Finance was enticing because the rewards were so substantial that it became irrational not to go into finance.
October 12th, 2008 at 9:28 pm
As a mathy-engineer who went into finance, I agree that this is a thing out there – a brain-drain to finance from engineering and science. It won’t be a bad think to see this sector shrink.
However it’s a big field – I’m not a parasite, and honestly the work is much more interesting, varying and exciting than most of traditional engineering (not to mention less likely to get outsourced, at least for the time being).
October 12th, 2008 at 9:34 pm
I thought this was (unintentionally?) funny. Rather than have the financiers say, create anything, they should model and consult. This is likely a pretty accurate version of reality, but is somewhat contrary to the other points in the article.
I think I heard somewhere that if you want your guts rewarded, go to finance. If you want your intellect rewarded, go to academia, and if you want neither, be an engineer…
October 12th, 2008 at 9:43 pm
As a math ph. d. candidate, I can at least take some solace in the fact that the ethical dilemma– sell out to Wall Street or take a dead-end academic job– no longer exists.
October 12th, 2008 at 9:49 pm
However it’s a big field – I’m not a parasite, and honestly the work is much more interesting, varying and exciting than most of traditional engineering
At the end of the day, I have to admit that I’m going to ride out this mess in my stable engineering job while taking financial engineering classes at night. Politicians love to say how science and engineering creates the path to America’s future, but the truth is that unless the government is willing to guarantee employment, engineers and scientists can’t afford to do their work in the name of public service alone.
Part of it is that the US made a decision that its economy was going to be driven by the finance sector. It would be nice if it weren’t, but that’s not a choice that any of us have… so if you want to succeed, you do what the national economy values and nurtures. I know everyone is claiming that finance and banking is going to shrink, but I don’t see that happening: be value our financial institutions, and we’re going to make sure that they get back on their feet and retake a central role in driving our economy again.
October 12th, 2008 at 9:49 pm
Tyro -
Exactly. When finance is promising so much more money for the same effort, you’d have to be an idiot not to do it. Well, I’ve learned that I’m an idiot. That, and I cannot stand New Yorkers and Wall Street types.
The problem with private-sector engineering is that there aren’t very many big Bell Labs-type firms out there anymore. Startups are just a crapshoot for engineers, where you bust your ass for a year and a half on the alpha phase until you learn that the upper management was incompetent and/or psychotic. Then, oh well, go to the next startup. Repeat until dead. Even if the startup is successful, it’s usually such a technologically minor increment that dumping so much time, money, and effort on it was an immoral waste of resources.
The problem with academic research and government engineering is that a lot of it comes from DoD. Guess what they want? Nothing that a normal person would buy. If you get really good at building toys for them, you make yourself unemployable for anything else. While the job security is good, the money is not astounding (again, given the training investment). And they like to keep tabs on your personal life.
October 12th, 2008 at 9:50 pm
Oh yes, I definitely want the ethical and responsible geniuses who developed sub-prime mortgages and whosie-whatsit derivatives designing machinery instead.
Off topic, someone told me that it’s illegal for a presidential candidate to name people he’ll appoint to his cabinet before the election. I believed it, but then Tom asked at the debate who they’d make Treasury Secretary. Does anyone know if it is indeed illegal, and if so what the name of the law is?
October 12th, 2008 at 9:55 pm
I’m not a parasite, and honestly the work is much more interesting, varying and exciting than most of traditional engineering (not to mention less likely to get outsourced, at least for the time being).
As a former high finance guy, I would disagree with your comment that finance is varying and exciting. Once you stepped away from the stakes (see: Keynes’ gambling instinct comment), it was pretty dry, repetitive work. The thing that was varying and exciting was the pay.
October 12th, 2008 at 10:03 pm
I’m someone that made the jump from IT to financial analysis and it isn’t just about the money. It’s also about job security, which is virtually non-existent in the IT world. There’s also far less ageism in finance careers, while technical jobs are hard to come by for anyone over 40.
October 12th, 2008 at 10:03 pm
Peter says
“the conventional wisdom, at least in the blogosphere, is that an engineering degree is a Guaranteed Sure Thing”
Engineering is cyclical. Give me a dot-com bubble or a bogus missile defense shield project, and we’re rolling in it. Collapse the financial system and start umpteen ground wars, and we’ll be in the bread lines with the rest of you.
It’s NOT out of selfish interest that I say the government ought to go into “creative debt” by betting on energy independence. Just like the Internet, no one else will get the ball rolling. We need a national R&D project that, for once, has a f***ing point.
October 12th, 2008 at 10:11 pm
someone told me that it’s illegal for a presidential candidate to name people he’ll appoint to his cabinet before the election.
What’s illegal is to promise someone a cabinet position in return for support. As a practical matter, that means presidential candidates ordinarily have to keep their mouths shut about appointing specific people, because talking about appointing a particualr person could be viewed as an implicit quid pro quo . . .
October 12th, 2008 at 10:12 pm
Rea,
Right on, but do you know the name of the statute?
October 12th, 2008 at 10:20 pm
I’m a math PhD, and I had a phone interview once with someone from Jim Simon’s company. It was kind of an odd call, as we were both waiting for the other guy to do the sales pitch. Finally I asked him if I would find the work interesting. His reply : well, money’s interesting.
October 12th, 2008 at 10:37 pm
It’s not even just quantitatively minded kids that are going to wall street instead of energy, biotech, and the like. It’s basically any smart kid now that wants to pay off his loans and get ahead financially. I’ve heard Harvard profs estimate that 60% of the graduates are going into finance or consulting (and not a particularly pro-development type of consulting). It’s basically a simple decision from an individual benefit point of view–make 100K immediately after graduating, and 250K plus soon after, or do 2-6 more years of school and start at a lower salary with less upward mobility. Additionally, it’s an interesting paradox that finance is both required for the success of entrepreneurialism and sucking it dry.
October 12th, 2008 at 10:38 pm
Wow we’ve got a lot hands on smart guys in here. I salute and shamelessly associate myself with all of you.
Back to the political front, is anyone else slightly amused that some of the same people who were warning about the potential ugliness of a populist turn in the Democratic party are now celebrating the collapse of Wall St. and discussing proposals about bank nationalization without batting an eye? How far we’ve come.
October 12th, 2008 at 10:48 pm
Who do you have in mind, DRR? I don’t recall Matt being particularly antipopulist.
My attitude on bank nationalization has always been “Wow, what a cheap way for me to get ahold of bank stock!” I like buying at the bottom.
October 12th, 2008 at 11:05 pm
Ahh, and aren’t we naive….
Does anyone really think the we, the “quants” of the world, will move off to a more personally rewarding but less remunerative position in engineering or education or scientific research? The article below will soon disabuse you of those notions. It points out, that we, the quants, were the ones who stabbed wall street in the back by giving them that perfidious software that allowed these guys to make derivatives.
http://www.nytimes.com/2008/10/12/opinion/12dooling.html
YOU WERE THE ONES WHO CREATED “62 TRILLION DOLLARS IN IMAGINARY WEALTH!”
YOU WERE THE ONES WHO CREATED THE GORDIAN FINANCIAL KNOT THAT CAN NOT BE UNTIED!
SHAME ON YOU!!!
The heads of investment banks were not at fault. They were simply so dense they listened to you. (Ok. So they got millions in bonuses. They deserved them, didn’t they, just for being there?)
YOU MUST BE PUNISHED!!! YOU WILL NOT GET ANY JOBS. WE WILL GO BACK TO COUNTING STOCKS WITH WILLOW STICKS!!
HAH!!!
Isn’t it interesting? The bastards who got us into this mess are dreaming up rationalizations for their incredibly stupid decisions and they are happy to pass the blame onto anybody they can. From what I can tell, the software was the one thing that worked in this mess and the idiots who fed the fake data into it are going to walk away scot free.
Maybe you can get jobs as Latin teachers. The Times says that’s the up-and-coming field.
Stercus tauri.
October 12th, 2008 at 11:12 pm
As of those newly minted math PhD’s (from one of the top programs in the country), I don’t really appreciate Fareed and Matt dancing on the grave of my once-pomising-to-be-lucrative career. I kid, I’m actually still in academia (a glorious postdoc), and let me tell ya, there’s no shortage of us. The academic job market is brutal, brutal, brutal, with often hundreds of applicants for a single position. (Of course it’s often the same hundreds for each position, not necessarily distinct hundreds, but still the ratio of applicants to positions is simply awful.)
I guess my only point is that I’m not really feeling very in demand, and does anyone want my resume?
October 12th, 2008 at 11:19 pm
I guess my only point is that I’m not really feeling very in demand, and does anyone want my resume?
Your mother is hoping that one of these days you get tired of math and decide to apply to medical school.
October 12th, 2008 at 11:34 pm
Good luck, Wang Chung.
I just did the philosophy job market last year. 99 applications, 2 offers. Now I’m on the opposite side of the planet (in a nice tenure-track gig that has time for research, so hooray). Academic jobs in any field, except maybe computer science, are really really tough to get.
October 12th, 2008 at 11:51 pm
A friend of mine in finance(who is very smart) once told me a story. He said that the quickest way to profit was to sell something for more than you paid, but that was really hard to do when everyone knew the actual value of the item being sold, so the best thing to do was to make up something so complicated and hard to value that you could trick people into paying way more for it than you paid and hope no one figures it out until after you’ve made tons of money. This is almost verbatim how he described the purpose of CDO’s to me in 2004. I always thought it was such a shame that such a smart guy was basically working as a snakeoil salesman.
I agree that hopefully we can find better and less evil things for these smart people to do.
October 12th, 2008 at 11:52 pm
I guess my only point is that I’m not really feeling very in demand, and does anyone want my resume?
If it’s any consolation, almost everyone I know is feeling like that right now–even those with jobs.
October 12th, 2008 at 11:57 pm
I thought that the investment banks were leveraged against their private capital base. Now I realize that they were leveraging against the United States Treasury.
If we are now returning to the time honored tradition of a ten to one leverage ratio under our new socialist banking system, I can’t see how we can pay a bank ceo ten times more than the medium income of a United States citizen–n’est-ce pas?
October 13th, 2008 at 12:19 am
We should probably differentiate against typical finance jobs(equity analyst) and specifically the financial modeling/quant/math jobs. I have no idea what’ll happen to the quants – I know there is huge demand in china for American experience.
At the end of the day, if you can do sas and c++ on large data sets they’ll be work – it just may be less glamorous going forward. (patf – enron traders were back in vogue as energy traders!) Though after reading that nytimes comment maybe it’ll be angry mobs instead.
As others point out, engineering jobs tend to be crappy and high volitilty these days (think dilbert, plus outsourcing). There is a lot of hassle,ageism for not all that much pay.
October 13th, 2008 at 12:40 am
Neil, I wasn’t implicating Matt in anything. I was referring to people like self proclaimed cosmopolitan and defender of “elite” values, Fareed Zakaria.
October 13th, 2008 at 1:15 am
I wonder why both Matt and Fareed feel that science and engineering are disabled simply because all the math majors went into business. Last time I checked it was the physical scientists and engineers that were doing that sort of work. Its been a long time since that was not true.
Let me give you two examples: Manhattan project (1940s) was driven by physicists, chemists, and engineers. The “golden age” of petroleum in the 1950s was due in large part to the maturation of the chemical engineering discipline and the subsequent harnessing of petroleum for more than lamp oil.
Don’t get me wrong, math is critical, just not usually the math PhDs.
October 13th, 2008 at 1:20 am
engineering jobs tend to be crappy and high volitilty these days (think dilbert, plus outsourcing)
rortybomb, can you give me some real evidence that “engineering” is this way? There are four primary engineering disciplines: chemical, civil, electrical, and mechanical, Dilbert is none of the above. Its primarily “computer engineering” (which used to simply be called programming) that is suffering from outsourcing. It is not 100% true, but I think the distinction is important.
October 13th, 2008 at 1:41 am
Does anyone know if it is indeed illegal, and if so what the name of the law is?
It’s the Pendleton Act, which was passed in 1883 after the assassination of James Garfield. Sarah Vowell talks about the spoils system and the civil service reform movement in Assassination Vacation.
Last time I checked it was the physical scientists and engineers that were doing that sort of work.
Last time I checked among my peers, it was the maths PhDs who went into the financial modelling stuff in the City — I just checked one guy’s bio via the Google and it mentions CLOs, CDOs, mezzanine loans and other credit derivatives — the physicists became management consultants, and the engineers went on to design cars.
October 13th, 2008 at 2:02 am
sm – you are right; that comment was glib and poor and mostly anadoetal related to programming.
October 13th, 2008 at 2:19 am
Academia gives you enormous control over your own time, and in an ideal academic position you can probably teach, do a lot of research thinking and writing, and still find time to earn some extra money on the side or play golf on a Wednesday afternoon.
October 13th, 2008 at 2:24 am
take away the finance path and a Physics/Math/Engineering PhD becomes even more financially suicidal than it already is :/ (/bitter)
October 13th, 2008 at 8:29 am
99 applications, 2 offers.
Lucky bastard!
Wang Chung, I feel your pain about the difficulty of the job market for math people. But I think that math is probably an adaptable enough skill that, if the finance sector stopped absorbing skilled mathematicians, there would be other more socially productive industries that would employ them. My college roommates were both very skilled math students; one of them went into a hedge fund after getting his master’s, the other was working on a web 1.5ish optimization algorithm for a while after doing a postdoc, and we’d probably be better off if the web sector had grown instead of the finance sector. (The finance guy is, as I understand, still wildly successful, makes 1000 times my salary, and in 2006 dumped twice my annual income into what looks like the Daily Kos Act Blue page.)
October 13th, 2008 at 8:33 am
…lest anyone think I’m complaining, I’m very happy to be in academia, where I like my job, I’m making decent money, and (extremely important) I have great job security, at least until my tenure review. And the university president says we can meet our cash flow needs!
October 13th, 2008 at 12:33 pm
And we can only hope that with suburban parents now unable to give their pubescent children wads of cash to blow irresponsibly we may see some good movies being produced once again and an emerging new era in the music industry as bling loses its greatest commercial base.
October 13th, 2008 at 4:56 pm
“I guess my only point is that I’m not really feeling very in demand, and does anyone want my resume?”
Hey, there’s always Law School, right? The partners in the blue-chip firms I know all make 7 figures. It sucks the life out of you, but no more than finance, or latin.
Or if you really want to do something “productive”, become a political pundit like Matt or Fareed.
October 14th, 2008 at 12:44 am
“Or if you really want to do something ‘productive’, become a political pundit like Matt or Fareed.”
I laughed so hard! Seriously, what does it mean to do something useful?
October 14th, 2008 at 7:50 pm
I just returned from a week of training in the art of LEAN Enterprise Management or Lean Manufacturing if you will. I work for a pharmaceutical company. I have far more respect for our plant manager than I ever will for the boobs on wall street who cook up all these stupid investment instruments that are, as I heard recently, predicated upon a bet on a bet on a bet on a bet. I’m sorry folks but what’s wrong with some of these math majors and engineers going out and learning how to run a real company from day to day? We don’t need any more financial modeling for god’s sake. We’ve had enough of that. What’s wrong with smart people actually going out and doing something productive?
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