Stiglitz Tells the Truth, Sorta
Mon, Jan 4, 3:07 PM ET, by Kenneth C. Bateman, The Brookside Letter
Sometimes I can agree with a person, and simultaneously disagree with a person… And Joseph Stiglitz does a decent job of that here.
Joseph Stiglitz didn’t mince words when he kicked off the American Economic Association’s annual meeting in Atlanta on Saturday. The Nobel laureate, who teaches at Columbia University, launched into a blistering attack on fellow economists for building models that rely on rational behavior when the financial crisis offers so much evidence of irrationality.
Wall Street also got a broadside. To Mr. Stiglitz, the purpose of a financial system is “to manage risk and allocate capital at low transaction costs.” What actually happened? “They misallocated capital. They created risk. And they did it at enormous transaction costs.”
First is the issue of rational actors. Most people were rational — it is just that they don’t want to admit it. It is just the fact that the method for maximizing short-term gains was at odds with the achievement of long-term gains. And as Keynes famously said “in the long term, we are all dead.” Perhaps the modern equivalent comes from S&P: “Let’s hope we are all wealthy and retired by the time this house of cards falters.” There was nothing wrong in the short term with an exotic lending. Banks could book a sweet profit and proclaim they are helping people get into home, and people who could not afford a home could have a place to live for a few years. But in the long term, it turns out that lending money to people who can’t (or won’t) pay it back is not a good business decision.
Secondly, who says the purpose of the financial system is “to manage risk and allocate capital at low transaction costs”? Surely that is not the lesson of the last 10-12 years, where allocating capital in magnificently stupid ways has lead to great reward – or at least the lack of any real negative consequence — for those involved. Creating large amounts of risk leads to a too big to fail institution… and then there is nothing greater, since you will be ensured limitless life support. In short – he is right, but he is wrong.
He is right in his points, but the focus on the short term and the elimination of capitalism’s greatest virtue — failure — have trumped it.
Finally, Stiglitz also goes after the idea that the “best and brightest” work on Wall Street. This is a populist shot at best — and while it makes people nod, it misses the fact that his profession is at least tangentially involved:
As for the bonus culture, Mr Stiglitz called time on the myth that Wall Street is populated by the best and the brightest who deserve their big paydays. “When I look at the salaries some of our ‘B’ students got [on Wall Street], it doesn’t correspond to their innate ability.”
So if these people really aren’t the best and the brightest, why are they getting B’s are Columbia University? This isn’t a community college, it Columbia University, where the professor is literally a Nobel Laureate. Who’s fault is that? Those lax standards allowed these people access to the financial system — via their supposed superior education credentials — where they could do their damage. So have the top tier universities mortgaged the value of a diploma from there to placate tuition-paying parents and ensure that little Johnny gets a grade of A? Lesson: Handing out A’s to everyone has consequences. I would be more impressed if he made a speech to his academic peers, admonishing them to look at what they have done.
And of course, there is the issue that some professor who knew me when I was 22 years old, is really not qualified to comment on my ability to learn over a long period of time.
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