Friday, March 18, 2011

A Lawyer's Perspective on... Promoting and Preserving Failure in America

It was with considerable sadness that I learned, during the financial crisis, that people I knew - economists, investment professionals, bankers - had given bad advice to their companies and their clients. They had not seen a housing bubble developing. They had not seen a highly over-leveraged banking system. They had not questioned the viability of an opaque derivatives industry that was growing exponentially. In fact, they had not seen any abnormal risk. And they had advised their clients and firms accordingly. As a result, their funds and their portfolios and their clients lost massive amounts of money.

I was concerned for these people. After all, their inability to call a major economic catastrophe, with plenty of warning signs, had led to horrible losses. And since plenty of people had been predicting a collapse... I assumed that my friends would all be losing their jobs, and their reputations.

I could not have been more wrong. That's not how it works in the world of elite finance and economics. In the highest echelons of economics and banking and investing and advising, the people that succeed are not the ones that get it right. The people that succeed are the ones that do what they have to do in order to succeed.

Fifteen years ago, I completed a Masters Degree in International Economics at the Johns Hopkins School of International Studies. I had studied with a number of people that ended up working at top banks. In 2005, I had been considering a home purchase but was becoming convinced that real estate in the USA was in an unsustainable bubble. At that point, I had been working as an attorney for a number of years - so I thought I should speak to an expert. I called an economist friend of mine that had ended up at Goldman Sachs and asked him about the possibility that there was a bubble that could be bursting. He assured me that the economy was strong, and robust, and that I had nothing to worry about. He told me that economists who were worrying about potential weakness ahead, had it dead wrong and that they should be ignored. He called them "crazy".

If I had listened to him, I would have bought a house at the height of the market - and would have lost every penny of down payment that I had managed to scrape together. Luckily, I did not listen. Instead, I considered what he said. Then I read more about what was going on and decided to take a huge risk - I decided to ignore the experts, to not to buy a home, and to risk missing out on the huge appreciation that those experts were predicting. In the end, he turned out to be wrong - not jut a little bit wrong, but absolutely and completely incorrect.

I didn't see him until after the meltdown was well behind us. I assumed he had lost his job. After all, his analysis was an absolute disaster. And he had been more than willing to share it.

Here's where my own powers of analysis failed in a major way: I assumed that he would have lost his job; instead, he had been promoted. In fact, not one person I knew in the financial industry had lost their job. I remember subsequently chatting with another Goldman Sachs economist shortly after the bailouts. He seemed completely unaware that there was even an issue with regard to how the industry had been protected.

My very fortunate friends turned out to be a perfect microcosm of what we all witnessed: the worst analysts with the worst judgment that got us into the worst financial quagmire in a century, were not only maintained - they were promoted. This happened in the private sector, academia, and in the public sector. In the public sphere, Tim Geithner and Ben Bernanke come to mind. And let's not forget Robert Rubin and Larry Summers. (And I would sincerely appreciate it if we could stop hearing from Alan Greenspan - arguably the arch-architect of our misery.)

We all know why my friends ended up on top; we bailed out their failed banks and our compromised financial system. That is wrong on many levels. But it's not as wrong as what has happened within our government. If our political economy had been functioning properly, Geithner and Bernanke would have lost their jobs - and their influence - long ago. Instead, Bernanke is arguably the most powerful individual in the world. And Tim Geithner (an alum of mine from SAIS!) is not far behind.

The United States has an incredibly resilient economy. It has withstood mismanagement and corruption on a scale that rivals almost any country in this world. It continues to putt along, notwithstanding the undermining of meritocracy, fairness, and justice - in multiple spheres. Unfortunately, the long-term prospects for a system that promotes the most corrupt and most compromised actors is poor.

Even the most resilient economy on earth requires the rejuvenation that comes with the removal of people with failed ideas, poor judgment, and who are corrupt. Our current leadership has taken a stand when it comes to our economy: instead of weeding out the corruption and allowing for organic economic strength to return, they are working to overwhelm the corruption-induced-failure with the economic equivalent of steroids. That can only work temporarily when the worst and most corrupt actors are allowed to thrive and maintain leadership roles. Ultimately, those compromised people and their compromised ideas will threaten our macro-economy again. We will never need principled and courageous leadership more than when that eventuality is upon us.

1 comment:

Anonymous said...

Your article basically describes your belated awakening to the new reality (or lack thereof) that currently rules in the United States of America. Congratulations.
But while you've correctly discovered that the so called 'experts' in America are actually just ignorant shills, it seems you've YET to discover that the United States suffers from INSTITUTIONALIZED FRAUD.

Institutionalized fraud means that there is NO ACCOUNTABILITY, NO RULE OF LAW and NO CONSEQUENCES for bad decisions & behaviour.

Institutionalized fraud is also the main reason why the U.S. is quickly becoming a Third World Shythole. GO ahead, call one of your friends and ask them if it's true the USA is a huge festering Kraphole and see what they have to say about it....

CWF