I am still recovering from the Milken Conference, and unlike my fellow blog panelists Paul Kedrosky, Felix Salmon and Mark Thoma, have not written any posts on particular sessions. In part, that was because in my other life as a consultant, I am well aware of the dangers of relying on memory even though mine is pretty good, and I had decided to listen rather than take notes.
But the other reason was in almost all the sessions has a strong element of overt pressure on the speakers to maintain an upbeat tone, combined with repeated reinforcement of Republican/Chicago School of Economics ideology. Normally I would not deem that sort of thing worthy of mention if it were a minor and only occasional element of the program; indeed it would have been valuable if other views had been tolerated and some sparks flew. No, the private sector/deregulation cheerleading was pervasive and baldfaced, and made it hard for me to sort out signal from noise. There were enough cases where I knew the data and knew it to be misrepresented so as to call a lot of what I was hearing into question.
I did manage to see one session that was free of that, by theoretical physicist Lisa Randall talking about her work (needless to say, it was way beyond me, but she did a good job nevertheless), and putting in the lone plea I heard for government intervention. She said the US was losing its edge in her kind of science due to our inability to make commitments that we will adhere to for large scale experiments, like the one at CERN this summer. And she told us it will not make a black hole that will destroy our universe, since the energy involved will be insufficient to produce anything other than a black hole that would dissipate immediately, and the odds of even that were extremely low. But her session had at most 60 in the audience, while the big presentation later on, with Eric Schmidt of Google, Craig Venter (famed for decoding the human genome) and Muhammad Yunus of Grammen Bank, had frequent comments by Venter about how badly the government funded efforts to decode the genome has performed relative to his efforts (with Milken as moderator making supportive noises). Um, isn’t it possible that different types and scales of science require different approaches? And no one seemed willing to acknowledge that our vaunted pharmaceutical industry depends heavily on Federal funding (I’ve seen estimates in the 40% to 55% range).
Mind you, there were some signs of dissent from the Panglossian posturing. Myron Scholes, both in the large lunch (“Four Nobel Prize Winning Economists”) on Tuesday and in a panel discussion on innovation in financial services on Wednesday, attempted at several points to take issue with some of the ideas that might have been oversimplified, and met considerable resistance, as did Edmund Phelps, And I noted what care Scholes took to be precise and non-controversial in his presentation. For instance, in the lunch, Milken, who was the moderator, put up a quote from Joseph Stiglitz which said that we were in the worst financial crisis since the Great Depression. Note that Stiglitz isn’t alone in making that sort of observation; Soros and various private analysts (and not just Nouriel Roubini). Even the IMF has been unusually outspoken about its concerns.
So what was the response? The economy is not in a recession, unemployment is low, ergo all this talk is off base. Scholes pointed out that we aren’t through this yet and in hindsight things might look different, and was almost hooted down (the response was something like, “we are here to try to forecast the future. Looking back is easy.”). Similarly, it was Scholes on the second panel who was the ONLY one I heard mention (and only obliquely) the massive facilities the Fed has implemented, and the efforts made by other central banks.
So this group was also a singularly ungrateful lot. Not only was there NO acknowledgment of the magnitude of the efforts made on behalf of the financial services industry, but every time the government was mentioned, it was with derision and elicited considerable applause.
Not that everyone there drank the Kool-Aid, mind you; in fact, the number of like minded might have been quite substantial (during the dinner the second night, the mention of Obama elicited more applause than the other candidates). I had some very good discussions with some others participants despite the impediment of a conference badge that read “Press.” One was quite incensed (“Where’s the humility?”) and later said the fans were turned up high so no one could smell that they were shitting in their pants. Ouch!
But the example that bothered me the most was the panel on financial innovation. The panel consisted of Lewis Ranieri (who created the mortgage backed securities business), Richard Sandor (who invented financial futures), Myron Scholes, and Milken. Some of the lines of thinking were truly peculiar. What was bad about our financial crisis wasn’t that is has and will continue for at least the next couple of years to do damage to people’s lives and businesses. No, it was that other countries might become skeptical about financial innovation and thus deny themselves the opportunity to use financial innovation to solve problems like climate change and poverty
Ranieri was far and away the most downbeat on the panel, yet was repeatedly steered away from expressing his views fully. He felt that the problems we witnessed are not inherent to the products (ahem, are the bad incentives inherent or not? How do you separate that out?). He pointed out that the economic difference between doing a mod with a borrower who had some ability to pay was 30% (and in context, he seemed to mean 30% of the value of the original mortgage). He acknowledged that the modifications weren’t being made, that the industry needed to cut the Gordian knot and might require legislative relief to do so. He also said that things could get very bad (he invoked the Great Depression) if this path wasn’t taken. Mind you, that train of thought came out in snippets, with many attempts to steer him away from it. Milken, by contrast, claimed it was another example of highly regulated banks doing stupid things, just like in the sovereign debt crisis of the late 1970s (conveniently forgetting the role Wall Street played in structuring and selling the product, and in repeated and aggressively contacting mortgage orginators and telling them they wanted more product). Milken also maintained that the government should not get involved, the private sector could do a far better job of handling this, again conveniently ignoring the massive subsidies extended by the Fed via negative real interest rates on the short end of the yield curve and an alphabet soup of new facilities. I could go on, but you get the point.
An article earlier this week in the Financial Time by Abigail Hofman focused on the deeply-seated cultural issues that produced the crisis:
I worked for 18 years in investment banking and several aspects of the culture unnerved me. Investment banks are all about making money. At the extreme, this means making money for employees not shareholders. The big revenue producers are revered. It is not considered prudent to upset them by asking too many questions. The subprime meltdown is a perfect example of the “emperor has no clothes” phenomenon. These were complex products, yet obfuscation was considered acceptable. Bank chief executives should have asked more questions. I suspect they saw the juicy profits and hoped underlings understood the risks.
Moreover, investment banking culture has a cult aspect to it. If you work on Wall Street or in the City, you toe the party line. Despite lip-service to “diversity”, diversity of thinking is not encouraged. This atmosphere of craven conformity breeds at first complacency and then mistakes.
The Milken conference provided vignettes of how to cultivate conformity: select the likeminded, or at least sympathetic, for high profile roles, and apply subtle and not so subtle pressure to make sure they stay within approved boundaries. But as Hofman’s comments suggest, this isn’t a Milken conference problem; rather, the conference illustrated certain behaviors found widely in the financial services industry (note also that, at least in my day, most firms were agnostic about their staff’s political leanings).
A long time ago at McKinsey, one paradigm they mentioned was that people fell somewhere on the spectrum of internalizers and externalizers. Internalizers tend to blame themselves for what happens whether it was their fault or not. They are very conscientious and strive not to repeat their errors. Externalizers blame everyone else for their problems. They are very resilient and well suited to sales jobs. And they are incapable of learning from their mistakes, since they never make any.