Tag Archives: David Leonhardt

The Pirate Pose

David Leonhardt today

What happened? Banks borrowed money from lenders around the world. The bankers then kept a big chunk of that money for themselves, calling it “management fees” or “performance bonuses.” Once the investments were exposed as hopeless, the lenders — ordinary savers, foreign countries, other banks, you name it — were repaid with government bailouts.

In effect, the bankers had siphoned off this bailout money in advance, years before the government had spent it.

I understand this chain of events sounds a bit like a conspiracy. And in some cases, it surely was. Some A.I.G. employees, to take one example, had to have understood what their credit derivative division in London was doing. But more innocent optimism probably played a role, too. The human mind has a tremendous ability to rationalize, and the possibility of making millions of dollars invites some hard-core rationalization.

Either way, the bottom line is the same: given an incentive to loot, Wall Street did so. “If you think of the financial system as a whole,” Mr. Romer said, “it actually has an incentive to trigger the rare occasions in which tens or hundreds of billions of dollars come flowing out of the Treasury.”

I can’t understand the compunction to call the set of rules, institutions, laws, and regulations in the market of the last 40 years capitalism.  Under no understanding of capitalism do the rewards of risk-taking go to the pirate, but the losses to the public.

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Behavioral Economics Explains All and Saves All

So says David Leonhardt in the Times. But let’s say you work for a firm that specializes in applying the latest theories in management and organizational behavior.  Idea factories, like HBS and Wharton, spew out cutting edge techniques and models, sending them to dealerships like Boston Consulting Group and McBain. Hordes of 22 year olds fight for the opportunity to work at the dealerships, where they are promptly turned into cubicle donkeys whose sole aim is to help businesses lower the costs of production while maintaining or improving the quality of the product.  It’s all good, there’s nothing new in any of this and you get to write “Management Consultant” on your egg shell white business card.  Yawn.  

But now you’ve read about some great new theories in management consulting, only instead of coming out of HBS or Wharton, these theories have respectable return addresses in economics and psychology departments.  As a purveyor of these theories, your social life immediately changes. Instead of saying management consultant, you get to call yourself a “behavioral economist.”  Suddenly you are a savior and David Leonhardt sings hosannahs, praising everything you have to say as the new new thing:

“The sort of deficit we’re now facing will require some pretty creative plans. Fortunately, there is a group of economists who are almost ideally suited to help Mr. Obama with this task — to come up with budget cuts that can reduce government spending without harming the quality of government services. They’re called behavioral economists.”

Why all the name changing? Why not just call them management consultants? Obviously because these are no ordinary management consultants. They don’t work for profit. They don’t help businesses. These are the holy beasts of the new paradigm, immune to the constraints of common sense and history. They are the agents of change we can believe in.  To the rescue, come forth the behavioral economists: 

“This person would work with Medicare officials to improve drug compliance. He or she would think about how mortgage regulations should be rewritten, how health insurance choices should be presented and how carbon emissions might be cut.”

And the dollar will do this, and the yuan will do that, and the rising tide of the nationalistic nanny state will lift all the subprime dinghies carrying our irrational good grey burghers. Why did our burghers buy those risky subprimes?  Such a foolish question! Obviously the behavioral economists know why! Sez Sendhil Mullainathan of Harvard: 

“It’s impossible to think of the current mortgage crisis without thinking seriously about underlying consumer psychology. And it’s impossible to think of future regulatory fixes without thinking seriously about that issue.”

I’m patiently waiting for all those behavioral economists to announce the record earnings they obtained by acting on their theories in advance of the current crisis.  I’d also like to know how the principal agent problem figures in their analysis, as well as other neoclassical explanations involving the perverse incentives endemic to organizations like Freddie and Fannie. Alternatively, they could always just call themselves management consultants. After all, I hear Goldman and Morgan Stanely are looking for better ways to run their business.

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