The “Expert” Class
Principle three from Nassim Nicholas Taleb’s ten principles for a “black swan proof” world:
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.
Now I’m not even slightly surprised that neither this nor any of the other item’s on Taleb’s list have happened. Nor do I think it would be especially desirable to try. But what I really do find shocking is that there doesn’t seem to have been any movement at all in this direction. Whenever there’s a suggestion that there’s a need for housecleaning and clean hands, apologists for the status quo immediately leap in with the point that you need some veteran people with hands-on experience. And surely you do. But there’s a huge middle ground between firing everyone associated with this fiasco and firing nobody.
And we’ve done the reverse! Lurking beneath the amusing John Stewart versus Jim Cramer faceoff was the reality that even though CNBC is in a sense more discredited than ever, the financial crisis has made it a more influential news source, not a less influential one. Major financial institution CEOs seem to have more access and influence to high-level policymakers than they did before rather than less. And it’s not just that the top levels of economic policymaking haven’t been filled with people who were prescient about the severity of this crisis, nobody at all who was prescient about it seems to have been brought on board.
And it’s not just in the United States. We at least managed to have a change of administrations scheduled for a propitious moment. But outside of Iceland there have been basically no topplings of incumbent governments, no resignations of key officials, no nothing. The behavior is as if the financial system has, like Italy, been struck by a terrible earthquake and now the officials in office need to deal with it. Even the popularity of the term “black swan” seems to entrench the notion that some wild and unpredictable occurrence happened. But while this turn of events is pretty wild, it was unpredictable—plenty of people predicted something similar. And while I don’t think you ever should expect a wholesale turnover in elites and powerful institutions, if a shock this big doesn’t produce some kind of discernable change then I’m not sure what would or could.
36 Responses to “The “Expert” Class”
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April 8th, 2009 at 11:11 am
Well put.
April 8th, 2009 at 11:16 am
no H in Jon Stewart
April 8th, 2009 at 11:16 am
The elite always, always, always land on their feet. Working hard and playing by the rules is a mantra they sell the rubes. For them, hard work is one small part of the equation – bending the rules, breaking the rules, mutual back-scratching, and golf are much more important than mere hard work and foolish rule-following.
You social conservatives making less than $300k a year – the other half of the GOP coalition is laughing at you.
April 8th, 2009 at 11:19 am
The Simon Johnson article in the Atlantic nails this. In a crisis, banana republics first rush to safeguard the interests of the elite who are getting hammered because of their own stupidity. Until you break the back of the oligarchy, at least.
Obama’s campaign positions basically came down to giving us various new and/or improved systems (a new health care system, a new green infrastructure, better functioning government, etc.) It’s become increasingly obvious that we also need a functional finance system that is nice and safe and boring and supports the economy rather than fucking it up. He really needs to tackle this, start taking over banks and breaking up those that are too large and putting tough regs in place and prosecuting people by the truckload for fraud. If he can’t/won’t do this, the path he’s going down now is going to suck up so much money and political capital that health care etc. won’t happen. Also Obama will be looking at a one-term presidency. He really needs to get this right.
April 8th, 2009 at 11:19 am
I wouldn’t say no one has been fired–as you point out, the Republican Party has been a big victim of this crisis. At financial firms, many top executives have been fired over the past year:
Stan O’Neil (Merrill Lynch)
John Thain (Merrill Lynch)
Charles Prince (Citigroup)
G. Kennedy Thompson (Wachovia)
Angelo Mozilo (Countrywide)
Richard Syron (Freddie Mac)
Donald Mudd (Fannie Mae)
Kerry Killinger (WaMu)
Robert Willumstad (AIG)
I’m sure I have missed a few, especially below the CEO level.
Now I think part of the frustration people might have is that these guys were fired or allowed to retire, and each and every one of them had a substantial (and in some cases incomprehensibly huge) golden parachute. So they leave not only with no mea culpas, but truly unpunished. On the contrary, they were rewarded for their failures. The only “punishment” they got was to be kicked out of the companies they ruined.
April 8th, 2009 at 11:22 am
“…Major financial institution CEOs seem to have more access and influence to high-level policymakers than they did before rather than less….”
Matt’s surprised? Obama’s biggest campaign donor was the financial services industry. It’s just getting what it paid for.
April 8th, 2009 at 11:25 am
True, this swan is not black due to a genetic mutation in pigment production. It is black because greedy men stuck it on a spit and roasted it.
April 8th, 2009 at 11:25 am
True, this swan is not black due to a genetic mutation in pigment production. It is black because greedy men stuck it on a spit and roasted it.
April 8th, 2009 at 11:28 am
You forgot making the rules.
April 8th, 2009 at 11:29 am
This is absurd. Did the Great Depression really cause a wholesale change in the US government and the elite class? No. Did it cause these changes in other countries? Yes. Were those changes positive? In many cases they were in fact profoundly negative, obviously.
Of course people should be fired and imprisoned and bankrupted, and they are, just as they were post-Crash during the Depression. But, it seems like Yglesias is arguing here that the system itself should be disrupted in fundamental ways. If that were to happen, it would either have to be due to widespread hardship and true misery (far beyond what we’ve seen so far, and apparently in the US, even more than what was seen during the ’30s) or unstable political and economic structures.
That may yet happen. But, would it be a good thing? Possibly, there are cases in history where systemic change was positive. But, let’s remember that our starting point is, despite its faults, a relatively free, just, and democratic country – relative to historical terms, extraordinarily so… and the same can be said for the other Western democracies. Most places we can go from this starting point are actually fairly awful.
What I find absolutely galling about this post is its ignorance of the downsides of large-scale social change. It makes me truly upset that a commentator can be blind to history, so ignorant and arrogant within his privileged place in society. To talk about large-scale systemic change from such a position is easy, especially when you know that one way or another, you’ll end up close to the top.
April 8th, 2009 at 11:33 am
raivo pommer-www.google.ee
raimo1@hot.ee
DUMMES GELD
Es steht im Kleingedruckten, irgendwo ganz unten auf dem Prospekt: “Das Zertifikat darf nicht in den U.S.A. oder an eine U.S.-Person im Sinne der Regulation S des U.S. Securities Act 1933 verkauft werden.”
Nein, das Papier ist vor allem für deutsche Anleger gedacht, so wie viele andere Zertifikate auch. Kein Wunder, dass auch von der Pleite der US-Investmentbank Lehman Brothers besonders viele Deutsche betroffen sind – hierzulande wurden besonders viele Papiere der Bank verkauft.
Wer ein Zertifkat kauft, erwirbt damit keinesfalls einen Anteil an einem Wert, also an einer Aktie oder einem Fonds. Stattdessen ist solch ein Papier wie eine Wette. Gewettet wird auf die Entwicklung von Aktien, Rohstoffen, Indizes oder Wechselkursen. Deutschland war in den letzten Jahren das Land der Zertifikate. “Der Markt umfasst hier aktuell knapp 400.000 Produkte, monatlich kommen teilweise bis zu 40.000 neue auf den Markt”, sagt Harald Rotter von der Schutzgemeinschaft der Kapitalanleger (SdK). Im Dezember 2004 hatten die Deutschen 47,5 Milliarden Euro in die Papiere investiert, auf dem Höhepunkt im September 2007 waren es fast 140 Milliarden Euro. Ein rasantes Wachstum.
April 8th, 2009 at 11:41 am
We need a modern version of the WW2 “Proclaimed List,” of suspected Nazi sympathizers who were barred from any economic contact with the United States; I believe there is a current list of Colombians with similar bars for drug trafficking suspicions.
April 8th, 2009 at 11:47 am
“Whenever there’s a suggestion that there’s a need for housecleaning and clean hands, apologists for the status quo immediately leap in with the point that you need some veteran people with hands-on experience.”
This presents a false dilemma: you can find experts with hands-on experience in different parts of the financial sector who not only weren’t responsible for the financial crisis but were smart enough to avoid the worst effects of it. Experts such as John Hussman, of Hussman Funds, and Andy Beal of Beal Bank. The problem is that, instead of successful experts such as Hussman and Beal advising the government, we have ‘experts’ associated with firms such as Goldman Sachs, firms that would have gone bust in the last year if it weren’t for government largess. Essentially, the folks who screwed up so badly that they have had to get bailed out by the government are the ones advising the government, while folks like Hussman and Beal — who were smart enough to avoid the pitfalls and who have been successful without government largess — are on the sidelines.
April 8th, 2009 at 11:48 am
It’s clear that sbalive is fine with the general Postwar American power structure. It’s okay to be fine with it, I would just say that it makes you either misinformed or a right-winger.
I guess the question is, Marshall Plan aside, whether France’s 4th Republic is superior to Eisenhower’s military-industrial state.
Furthermore, there was DEFINITELY major systemic change during the New Deal. MY’s complaint is/should be that there’s no discussion of systemic change–there’s barely even discussion of replacing the boards of directors at the companies that have failed.
April 8th, 2009 at 11:50 am
I think there’s a typo in here:
“But while this turn of events is pretty wild, it was unpredictable—plenty of people predicted something similar.”
April 8th, 2009 at 12:21 pm
sbalive – Matt’s not talking about a revolution, he’s complaining that there doesn’t seem to be even a minuscule level of accountability or consequences for those who have had the power, made the rules, stretched the rules with crazy get rich quick magic money schemes, and for the most part get to keep the real money and power.
As others have said above, many experts did see this coming, but they have not been rewarded in any real way. It may be that accountability takes a lot longer than we would like. It took a few years for politicians who were against the Iraq fiasco to be eventually rewarded with the reins of power.
-j
April 8th, 2009 at 12:23 pm
Replacing a failed financial executive with another failed financial executive doesn’t impress anybody. Go outside. If you must have an experienced executive, there are plenty of other industries that haven’t wrecked the global economy.
April 8th, 2009 at 12:34 pm
I checked Matt’s home page to see if sbalive was responding to some other post and put it here by mistake. It doesn’t look like it. Maybe he was reading another blog at the same time and posted here by mistake.
April 8th, 2009 at 12:36 pm
Several people have made this point but it’s just false to say that “nobody” has gotten fired. Lots of people have. Besides the senior execs mentioned above, most firms have engaged in wholesale house cleaning of the traders who engaged in these trades. Matt and various other commenters just don’t differentiate between financial people. They all look the same to them! Seriously, if you want to point out specific people that should’ve gotten the axe but didn’t, I’d have no problem with that. I’d probably agree. I don’t weep for the people that have been fired. But once again, when it comes to corporate finance Matt jettisons his generally nuanced, reasonable approach in favor of a kind of broad brush, comic book unreality. Really, “firing nobody”?
April 8th, 2009 at 12:39 pm
Re Matthew’s comment “And while I don’t think you ever should expect a wholesale turnover in elites and powerful institutions, if a shock this big doesn’t produce some kind of discernable change then I’m not sure what would or could.”
—————-
Er.. there’s a reason for that:
“ACLU questions homeland role of active unit
By William H. McMichael – Staff writer
Posted : Thursday Oct 23, 2008 7:14:31 EDT
The American Civil Liberties Union is questioning the use of an active Army brigade as an on-call federal response force within the U.S., arguing that the military is barred from any role in civilian law enforcement and that the force could be used to help the Pentagon conduct domestic surveillance.”
From Army Times at
http://www.armytimes.com/news/2008/10/military_aclu_northcom_102108w/
April 8th, 2009 at 1:59 pm
Taleb is really starting to annoy me. Obviously, the people responsible ought to be punished… and that doesn’t seem to be happening, but look at his statement.
First of all, I’m sick of this whole “black swan” thing… this crisis was NOT NOT NOT! a black swan. A black swan is unpredictable, this was totally predictable (in fact if not in severity… but even some predicted that). A black swan, by definition, has no one to blame, it just happens… oh, we can hedge against it, but that’s all, and even that isn’t always a good idea (imagine relocating honolulu further inland to prevent the “black swan” of a massive tsunami wiping out the city… not worth it). Of course, Taleb has decided that blacks swans need blame, too.
The fact that there is someone to blame in all of this is bound up in the fact that this was no black swan. So who’s to blame? Taleb thinks economists… really? are to blame. I particularly like how its “establishment” economics, whatever that means. Full disclosure: I am an economist… so I don’t take kindly to the populist finger pointing. That’s not right, the ‘quants’ come from diverse backgrounds: physicists, mathematicians, etc. The wall street traders? if more than half of them have taken more than basic econ I’d be surprised. Wall street execs… probably know some econ, but really these people are not experts. The regulators… OK, they should know better, but frankly many did know better and much of the problem was political. Blaming economists for all this is like blaming the physicists for a bridge collapse.
Now, credit where its due; economists aren’t totally blameless in all this. As I see it, here are the contributions of my profession to the mess we’re in (full disclosure: I have always been skeptical of these ideas, so I’m a little biased):
1) Spreading the absurd (neo-classical) notion that allowing the business cycle to run its course is efficient (this can be thought of as an assumption of the neoclassical model).
2) Related to #1, helping spread market fundamentalism by promoting strong versions of the efficient market hypothesis.
3) Many economists who might have known better were too willing to sit by in their ivory towers while the clouds grew dark on the horizon.
4) Related to #3, economics as a whole is too infused with the politics of those who practice it.
For nos. 3 and 4, I’m really thinking of the microeconomists who tend to lean left and spend their lives studying market imperfections (and why not? macro people get to assume efficient markets; its a conservative wet dream).
April 8th, 2009 at 2:27 pm
Well, until it is recognized that the root of the current Depression was not the banks, and not mortgages, but inequality – the monstrous gap between the wealth of the wealthiest and the wealth of the “bottom” 80 percent – there will be only a shuffling among the players. Michael Perelman published a nice diagnostic piece in the October Challenge called The Corrosive Qualities of Inequality: the roots of the current meltdown. According to a 1995 study by GRG Clarke, “a reduction in inequality from one standard deviation above the sample mean [of a study of 71 countries] to one standard deviation below the mean would increase the long-term growth rate of 2.5 percent per annum. The growth we don’t get – that is pissed away by herding children into badly financed schools, encouraging high yield, short term allocations of capital, giving absolute leaway to the speculative sector to construct its own rules and instruments – has now smashed us. And will continue to until we face up to the fact that this is a wealth distribution problem. That the voodoo economic paradigm has been reduced to a trickle down model in which banks are propped up by fraudulent auctions in the hope that they will release enough credit that the median house owner can pay for higher priced houses is a sort of reductio ad absurdam of Reagonomics. The establishment, which promotes the laughable lie that the highest compensated “work harder”, seems to have bought into this fairy tale so much that they think that “hard work” will save the economy. This is like depending on the hard work of pirates to fight a naval war.
The state could expropriate more than half the wealth of the wealthiest and we would still have a masively unequal society; but one, at least, where growth would be pushed by the real, instead of the fake (financial), economy.
April 8th, 2009 at 2:34 pm
This is not about who or how many got fired. Some top dogs and their underlings got fired. Whip dee doo. It’s musical chairs. It means nothing.
Are the people responsible for turning Wall Street into a gigantic Ponzi scheme going to be prosecuted to the full extant of the law? That is the question.
Is the Justice Department, the FBI, or anybody else beside a few honorable journalists, going to investigate and then tear down this criminal house of cards.
Unless this happens, unless Big Finance is crushed, there will be no escaping a Second Great Depression, and just like the World Wars, the Second Depression will be much worse.
April 8th, 2009 at 2:56 pm
Hey Matt,
Thanks for pointing to the Taleb article. I’m not sure that point 3 is the most interesting one. I am curious though as to why you both single this one out and say that
Seems like a pretty blanket statement, but maybe it’s just being provocative.
And so we get @bepley (#24) that Taleb is tiring, and his mis-characterization of a Black Swan as something that is simply unpredictable.
As I recall (I don’t have the book handy), a Black Swan is something which is highly improbable (as opposed to unpredictable) and which has large effects. It looks unpredictable to those in Normalistan, where all distributions are Gaussian, but not to those in Extremeistan, which is where much of (economic) life is lived.
April 8th, 2009 at 3:54 pm
Amen. Goldman Sachs was and is as big a failure as any company in American history — including General Motors. So also, Citigroup and BoA. These all were and are spectacular failures that had to be bailed out by blue collar Americans. REPEAT: FAILURES.
Steadfastly maintaining that we need any of these clowns to lead us out of this mess is an indelible stain on BHO’s presidency. Allowing these losers to stick around through — indeed take credit for — America’s recovery is MORAL HAZARD writ large.
Not change I can believe in.
April 8th, 2009 at 4:06 pm
Amen again. Calling this a “Black Swan” — and thereby ducking responsibility — is as egregious as Condi saying “Who could have imagined terrorists flying an aiplane into skyscrapers.” In both cases, it not only was predictable, it was PREDICTED.
Letting these greedy, no good bastards slip the noose is an outrage. Summers is and was a failure — big time. Geithner is and was a failure — big time. Allowing them now to call the shots is preposterous — tantamount to letting Cheney design our foreign policy.
April 8th, 2009 at 4:56 pm
“We at least managed to have a change of administrations scheduled for a propitious moment. But outside of Iceland there have been basically no topplings of incumbent governments, no resignations of key officials, no nothing. The behavior is as if the financial system has, like Italy, been struck by a terrible earthquake and now the officials in office need to deal with it.”
Matthew,
you are wrong, and, interestingly, you yourself proved yourself wrong. You said not only the American government, but many others, including the European ones, are responsible for this mess. I agree. You say they should be replaced. I ask: by whom? Matthew, there are all sorts of governments participating in this mess: Centre-Left (UK), Harder-Left (Spain), Centre-Right (Germany), Harder-Right (France), Populist-Right (Italy) and so on. Should the left-wing government in Country A replaced by a right-wing one, and should the right-wing one in Country B replaced by a left-wing one? Is it really what you say? Do you really mean it would help? No, you cannot mean that, you are smarter than that.
Matthew, there are only two possible conclusions of this mess.
A) No government is responsible. Which we both agree is false.
B) It doesn’t matter whether it’s a centre-left or centre-right government, they have committed the same errors.
Which means there is no solution near the centre – some sort of radicals must be right: either the Marxists, or the Libertarians. Take your picks.
April 8th, 2009 at 8:20 pm
this is a cultural moment where there’s been a wide variety of books on why expertise is overvalued (”wisdom of crowds”, Gladwell, etc etc etc)–but this is I think ultimately just a new version of the old American political game, a game only elites get to play: the “regular folks” card is the winning card to play, but none of the players are actually regular folks….
April 8th, 2009 at 8:28 pm
one more thing: “experts” are not a “class.” lots of individual experts or even types of experts could lose their gigs and it wouldn’t matter to the middle class. now, if post-1970 developments in financialization and wealth distribution were changed, that’d involve a class. and that’s ultimately what’s needed: punishing individual experts is just vengeance (though I’m all for vengeance!)
April 8th, 2009 at 9:36 pm
Social Black Swan Theory
==========================
In a multi ethnic multi religious society, if a micro minority controls Banking, News media and through them all other institutions of the society, this can happen only through fraud, here is how they do it:
1. Few brilliant individuals become professors at key universities, then they start favoring students from their own tribes.
2. Over a period of time these dumb students with top academic qualifications occupies key positions in Banking and Media. They start recruiting more people from their own tribe eventually controlling these key institutions.
3. Takeover of the society is complete, using banking and news media they will start blatant manipulation of all other social institutions, politics and eventually control most of it.
4. This continues for some time then one day the society wakes up and understands what is happening and a social uprising happens and most of the parasitic class are eliminated.
5. The key to prevent social subjugation of majority people by minority tribes is – institutions like Eduction, Banking, News media should reflect the overall composition of the larger society if not social fraud is happening and fraudsters call it “merit” in reality it is pure and simple fraud/corruption and greed. Why is Chairman and majority directors of Federal Reserve from the same tribe for past 30+ years? Doesn’t the American people have minimum common sense are they blind?
We can see from the actions of top executives in banking sector in America most of these executives are in those positions not by merit but by fraud. Their only reason being in those positions naked greed.
Banksters and News Media have no cloths…. think…….
April 8th, 2009 at 9:36 pm
I don’t think it’s clear where the blame lies. To what extent did the Bush Administration’s massive borrowing put pressure on financial firms to come up with “innovative products” to facilitate the government borrowing? When a government is living beyond its means, what pressures are brought to bear on private financial companies? Also, when it’s permitted to change 22% interest on credit cards, why would financial companies want to focus on the simpler things, like accepting deposits at 2%, and lending money at 6%. The government needs to get its act together, and restrain its spending, and provide sensible financial norms and regulations. Capitalism is not anarchy.
I sympathize with Matt that perhaps more heads should have rolled in the financial industry. But what I think we need to get rid of, more than specific people, is the woefully inadequate web of regulations, or lack thereof, which completely failed to anticipate this mess. I’m actually a libertarian in temperament, and government regulation is usually the last thing I’d consider, but I think that without a sensible set of regulations in the future, this kind of financial disaster could happen again.
April 9th, 2009 at 12:49 am
Ming, interesting point about the different rates of interest. The reason for that is that corporations are given carte blanche to incorporate in different states – like North Dakota, or Delaware – and be governed by their laws on such things as acceptable interest. For decades, this system has been a laughingstock. We should abolish it and make all interstate companies incorporate with the federal commerce department. No more Delaware rules.
April 9th, 2009 at 2:29 am
BTW, here’s my take on Taleb’s Ten Principles op/ed: “Has Nassim Nicholas Taleb Jumped the Shark?”