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Assorted links
1. Why the financial sector grew so much in the first place, from James Surowiecki.
2. The Atlantic Dozen, including Richard Posner, Daniel Akst, Richard Florida, and Edward Tenner.
3. The key issue in banking theory.
4. Don't blame Gauguin for van Gogh's severed ear.
5. I agree with Malcolm Gladwell on the financial crisis.
6. In fact a good argument against capitalism.
Posted by Tyler Cowen on May 5, 2009 at 11:38 AM in Economics | Permalink
Comments
"But that’s the Rubin trade: it works until it doesn’t."
And it doesn't work because it did work. Finance is awesome!
How much of a lopping off of compound growth with the uber-regulator is it worth to avoid a 10% recession once a generation? None?
People should look and if they aren't actually putting forth effort, they shouldn't trust their rising bank account.
Posted by: Andrew at May 5, 2009 11:55:59 AM
Argh! Richard Florida's overbought.
Posted by: Geoff NoNick at May 5, 2009 12:11:19 PM
I agree with Gladwell too, and I think you can extend his theory beyond Wall Street to consumers ("Main Street") since many people spent more than they had, due to overconfidence in their future income, ability to refinance, etc.
Posted by: RZ at May 5, 2009 12:16:26 PM
I think compartmentalizing overconfidence and incompetence as two characteristics totally separate from one another is nonsensical. Overconfidence is a specific type of incompetence. A manifestation. In establishing a cleavage point here it seems like Gladwell is: One, trying to be interesting at the expense of accuracy. Two, generalizing his inability to think of solutions to universal absence of solutions. And three, though I'm less sure of it, suffering from a circular reasoning halo effect where he assumes that the wealthy have merit because they are wealthy because they have merit.
Being smart and in finance is like being smart and in earthquake prediction. It's easy to be right almost all the time it's impossible to right all the time and being smart has damn little to do with being right.
Posted by: Michael Foody at May 5, 2009 12:45:46 PM
Golf 'aint so bad. Just expensive, is all.
Posted by: Pedro at May 5, 2009 12:46:01 PM
I guess that's why Americans are bad at soccer ... it's too socialist. Although given current changes I might hazard a prediction of it increasing in popularity.
Posted by: Mark Longbrake at May 5, 2009 12:47:50 PM
The problem with the financial sector (along with the legal sector) is that is extracts / consumes an inordinate amount of resources versus the value delivered.
Basically, you have the high-IQ class creating rules, regulations, and laws to generate massive amounts of high-salary employment to shuffle paperwork around.
Obamanomics does nothing to reverse this disasterous trend, in fact it only exacerbates it through yet more bureaucracy ("Green" certifications, etc.)
I think Moldbug is right: only a complete "reset" of our politico-economic system has any hope of freeing up resources from this parasitic and paralytic process.
Posted by: Matthew C. at May 5, 2009 12:59:32 PM
"Argh! Richard Florida's overbought." - Testify. He has one pretty decent idea and is milking it way past what it's worth.
"I think Moldbug is right: only a complete "reset" of our politico-economic system has any hope of freeing up resources from this parasitic and paralytic process."
People keep saying that, but how do you do a "reset"? I'm not being cynical. I really want to hear practical ideas.
Posted by: Dirk at May 5, 2009 2:16:31 PM
Surowiecki misses the key legal changes. Abolition of fixed commission schedule by SEC and Friedman's liberation of the bond market. Conglomerates weren't needed to diversify institutional investors after those changes.
Posted by: Michael F. Martin at May 5, 2009 2:48:15 PM
Why would somebody not like golf?
Posted by: josh at May 5, 2009 3:17:19 PM
Why would somebody not like golf?
Or, to put it another way, Why would anyone like baseball?
Posted by: Kieran at May 5, 2009 3:20:51 PM
Re Mark's soccer analogy, so is soccer perhaps like socialism in that there's a lot of people employed in the endeavor, but output is really low? ;-)
Posted by: JackTrade at May 5, 2009 3:41:26 PM
Re Gladwell,
Isn't every failure by definition due to overconfidence?
Posted by: bjk at May 5, 2009 4:06:44 PM
What it doesn't mention is occupation bias. At the local business school, you practically have to put your handicap on your application forms. I wonder how left-leaning occupations do at golf.... Unions and golf scores.... Then there's the feminist side of the discussion.
This could really be milked into a much larger article.
Posted by: D. Watson at May 5, 2009 4:09:21 PM
overconfidence came from the fact that bankers and the govt were malfeasant for a long time without negative effects. this was a result of the savings glut in asia (ok to squander money because it would just get loaned back to us at low interest) and risk management (distributing risk increased mean time between failure but also intensified failure).
Posted by: babar at May 5, 2009 4:13:03 PM
@bjk: Isn't every failure by definition due to overconfidence?
Bingo. For the record, this is exhibit BZK as to why no one should ever listen to Malcom Gladwell.
As someone commented in the link Tyler_Cowen gave, part of being an "expert" is knowing the limits of your expertise. So really, any failure due to incompetence can be rephrased as failure due to overconfidence.
F*** Gladwell.
Posted by: Silas Barta at May 5, 2009 4:19:28 PM
Socialist countries dominated, absolutely dominated unpopular sports.
Posted by: floccina at May 5, 2009 4:25:26 PM
The major problem with "free banking," at least on my
reading of the historical record, is that the money
supply and credit become overwhelmingly pro-cyclical.
The likelihood of exaggerated boom-bust cycles becomes
greater, not smaller. (This result is, in its own way,
a very impressive instance of the fallacy of
composition.)
Posted by: Donald A. Coffin at May 5, 2009 4:34:55 PM
You really ought to read William Black's account of the S&L disaster and get your head around the fact that there are very bad people out there posing as bankers. Very bad people.
These "errors" are not mistakes - any more than Kid Yellow's con schemes relied upon people making mistakes or being over confident.
Economists have to pay attention to criminology when massive and systemic fraud takes place. Reading Hare on psychopathy might also help.
Posted by: Michael Webster at May 5, 2009 8:38:41 PM
Surowiecki missed the key structural changes that drove the shift. Abolition by SEC of fixed commissions and liberation of bond market by Friedman made diversifying capital cheaper for investors than it was for conglomerates to do M&A for the first time.
Posted by: Michael F. Martin at May 5, 2009 9:30:15 PM
Historically free banking had a much better record than legally restricted/central banking as far as the business cycle is concerned.
And regarding Gladwell's theory of overconfidence, is he saying that it caused the boom and underconfidence caused the bust?
Sounds like the fist cousin of the "animal spirits" theory. Talk about a flight from economic theory.
Posted by: AADL at May 5, 2009 9:39:22 PM
Regarding to #6, any third grader could name in a long list of legitimate reasons against capitalism, and golf wouldnt be among them. Funny article, anyways.
Posted by: Alejandro Guerrero at May 6, 2009 3:45:58 AM
One cannot really understand the relative growth of the US financial sector, or indeed that of the UK one, for example, without taking into account such things as the low interest policy of the Fed, Bank of England, etc; the growth of public ownership of shares via things like 401k plans, rising prosperity and demand for more financial products, etc. Deregulation of hitherto-sheltered banks also played a part.
Posted by: Tom Burroughes at May 6, 2009 6:55:40 AM
Does it not strike anyone as odd that replacing "Wall Street" with "DC" would seem to make his comments even more appropriate? That is why I was struck by Obama's New York Times Magazine interview this weekend. I wished he were silly and did not understand economics - but that did not come out at all in that interview. And that is scary.
Posted by: wintercow20 at May 6, 2009 10:31:50 AM
ahhh.... malcom gladwell, go away, stop stating the obvious and in the case of this crisis; way too late.
Posted by: working class at May 7, 2009 6:06:08 PM
