Saturday, March 28, 2009

Bankers: The Height of Evil and Stupid

It's been 3 weeks, so maybe I should make another post!

The subject line really does appear to be one of the popular political lines drawn these days, though it's rarely explicitly laid at as such.

For instance, consider the following links:
1. Bankers are immoral
2. Bankers are stupid

Alright, I'm mis-characterizing #2 a little bit. The larger point of the IF post is that we need to regulate maximum bank size, because big banks have negative side-effects that carry real costs, without much obvious benefit. But one line does stand out:
Bankers are famous lemmings, and a whole lot of small banks who pile into the same poor investment can fail together like one really big bank

I am not entirely sure that this is going to be an effective rallying cry. First, one can hardly call the bankers "immoral" and then blame the lack of their morals for the current economic crisis. Now, certainly, there may be bad eggs among them, but the same could be said for any industry (Doctors still have to evaluate the moral importance of this guy, after all). The difference being that, in finance, a few bad regulations and a few bad apples can lead to major problems. In finance, one guy can lose $7 billion. It's very difficult for a single doctor, even if he is exceedingly incompetent, to start an epidemic. He would have to be consciously evil and stealing biological weapons from the US government.
There is also the obvious issue of making a bad bet. Let's say that the financiers were perfectly socially conscious. They might find their securitization of subprime loans to be a great social good, because they honestly thought that they were reducing risk while also providing houses to people who historically could not afford them. The African-American home ownership rate probably went up quite a bit during the Housing boom. That's a good thing, right?
Well, it's not a good thing if you realize that the bets you were making were bad. But then the error isn't of morals, but of information. Our bankers didn't cause a massive system collapse because they were immoral: they caused it because they were wrong.

There is also the issue of incentives; people were paid to do things that were wrong. Mortgage originators and their employees were paid by volume, leading to them selling lots of mortgages in an attempt to make more money. The same applies to other professions as well: doctors pushing drugs because they are paid to by drug companies, for example, or Arthur Andersen helping to cook the books at Enron. It's hard to be good when people are dangling a big paycheck to be evil. But that doesn't mean the industry as a whole failed because they were bad people, so trying to instill a sense of "wider social purpose" would be bad. We want them to be smarter.

And that's not to say bankers are totally stupid, either. For this, I'll outsource the arguments to Megan McArdle

Saturday, March 7, 2009

"A Vast Remaking"

So Sayeth the New York Times.

The summary of the article can be basically expressed as this in the layman's sense:
“These jobs aren’t coming back,” said John E. Silvia, chief economist at Wachovia in Charlotte, N.C. “A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.”

Or, this in the slightly more technical sense:
For decades, the government has reacted to downturns by handing out temporary unemployment insurance checks, relying upon the resumption of economic growth to restore the jobs lost. This time, the government needs to place a greater emphasis on retraining workers for other careers, these economists say.

Basically, the idea is that the crisis is exposing a lot of major cracks in how the American economy has been working over the past several decades, and there ain't no more Internet-Real Estate Bubble-Caulk to pretend the holes aren't there anymore. We fundamentally produced wrong: we are too focused on building new homes, new cars, and selling financial services. So now the recession is showing how weak we are, we need to reallocate our workers and our resources to other industries to get our economy on sounder footing.

To some extent, yes. The bigger issue isn't just what we produce, though, it's how we consume. Our savings rate has steadily been declining, and people have been taking on greater and greater debt loads to increase their own personal consumption. We wouldn't be building so many houses and so many cars if people actually saved more money instead of spending: they wouldn't be able to afford such massive extravagances.

So, yes...while we have to retool our industries, we also need to be thinking about how to ratchet down our consumption, so we go back to an economy based on the sound principles of productivity, capital, hard work, and growth.

Pledge Classes Begin Again-Economic Thoughts, Hazing included

Alpha Kappa Psi-Eta Rho Chapter begun teaching new pledges this past week.

Pledging for a fraternity can be a tough experience, even if you are attempting to pledge a chapter that ISN'T hazing you. And trust me, you don't want to be hazed, because it can be quite brutal. Some of the "milder" examples:
-Having to hold a match while saying the Greek Alphabet multiple times
-Underwear inspections to ensure you are not "wearing the colors" (pledges are not allowed to wear the official colors in some frats/sororities).
-Being forced to run many miles before an initiation ritual in order to induce exhaustion.

And hazing can even result in deaths.

We don't do any of that at AK Psi, but it's still tough. Here's what we require:
-Passing of 5 quizzes and 1 exam (about 70 questions)
-Attendance of at least 2 events of the following type: fundraising, social, philanthropy, professional
-Completion of a "signature book," meaning the pledges must get 2 signatures from every member of the local chapter
-Completion of a pledge project

And did I mention this all has to get done in 5 weeks? Eta Rho traditionally has an accelerated pledge program (5 weeks is actually the minimum allowed by the fraternity).
It can be very stressful. Not everyone makes it, and some that do are often extremely tense during those 5, 6, 7 week periods.

The reason we do this is obvious: we wish to impose high costs on potential members, so we can identify people that are not committed and weed them out. It's significantly easier to kick a pledge out of the program than to expel a full member who isn't pulling his/her weight, and in a school organization, there is actually a lot of weight that needs to be pulled. Particularly when it comes to fundraising. Our chapter has had some real disasters in the past with trying to procure funds, and it's not something we want to repeat.

One might think that pledges would be willing to drop out of the process, but historically this has not been the case. I should know: I've been the pledge educator at the Eta Rho chapter for a year, and I pledged myself. We usually have one or two people drop out in a semester, and we usually have more pledges that are cut from the program by vote of the full members. One pledge who was cut from the program is even back again!
So, it really does show that our pledges do actually have a high perceived value of the fraternity.

So, to think of it:
MBpledge>MCpledge>MCbrother. We work our pledges harder than our Brothers to ensure they are committed, but they are committed regardless.

Hazing actually takes this concept and applies it to some extent, but warping it. Hazing imposes a REALLY high marginal cost, implying that people that jump through those hoops must be REALLY committed.
However, my impression is that hazing really acts more through the mechanism of cognitive dissonance. People who have already jumped through the hoops find out that the frat they joined really ain't that hot...this confuses them and makes them feel uncomfortable, but they end up resolving this dispute in their mind by thinking "THIS FRAT IS REALLY UBER-COOL!"
Actually, that was a study cited in the first edition of "The Social Animal." People who had to sacrifice a lot to get into a dinner meeting of high people evaluted the dinner as great, whereas people who walked right in thought of it as "boring."
In essence, hazing is really more about mind-warping than proving your worth.
So it's a damn good thing our frat doesn't do it.

Plus, why would you want to hurt your family?

Sunday, March 1, 2009


If this doesn't qualify, I don't know what does!

Nine months ago he lost his job as the security manager for the western United States for a Fortune 500 company, overseeing a budget of $1.2 million and earning about $70,000 a year. Now he is grateful for the $12 an hour he makes in what is known in unemployment circles as a “survival job” at a friend’s janitorial services company. But that does not make the work any easier.

People have always been talking about the "real" unemployment rate in our society, going back to the early jobless recovery years of the Bush administration. A lot of talk about "hamburger flipper" jobs instead of actual well-paying jobs in the economy.

Tyler Cowen recently commented about underemployment as well, wondering whether if "unemployment" was still a good measure of a recession.

Tyler does appear to be right. When a society has a lot of different workers with different skill-sets, underemployment becomes a lot more "real" than a society where everyone is a front-line factory worker. And we supposedly have a lot of different skill-sets today. That's part of the reason over Robert Reich's concerns that stimulus money not go entirely to white construction workers.

However, I wonder how "heterogeneous" our labor supply actually is. I'll take a comment from an internet forum I frequent:
I think it's generally understood that college teaches you very little real world skill. Recruiters hire you out of college because you're young and you've proven you can accomplish something but not because you actually know what you're doing.

I remember when my ex girlfriend was completing her MBA and we ended up at the local bar with the recruiter for IBM. He said no companies he knows hires PHD's anymore only graduate students. Primarily because PHD's will analyze a problem way past the point where action against it is even relevant. They wanted smart people who can act.

He understood that people right out of college really have their heads up their asses. No real world experience. But they wanted young people with energy, people who at the very least, proved they can accomplish something difficult. That's what your degree is worth. Getting a good job afterwards relies on your charisma.

I didn't agree with everything, but there is anecdotal evidence that a lot of people end up in jobs that they didn't study for in college at all. Obviously, this isn't as big of a concern for "specialized" majors like engineering, but a lot of the education system is supposed to provide a more generalized knowledge that builds up your "transferrable skills." Basically, it teaches how you to do any job well, but not enough specific skill to be super-awesome-employee right out of college.

That's hardly heterogeneous!

On the other hand, we are probably more specialized than we were in the post. The investment bankers on Wall Street aren't going to be having too many more finance jobs in the future, since the economy needs to adjust away from finance. The point isn't that we don't face any underemployment, though. It's that I believe a lot of people are underestimating the flexibility of the labor force.
And, secondly, we need to ask ourselves what this is really a function of: are we having more specialized jobs (finance) because our economy is naturally tending towards that direction, or because our regulatory system helps create bubbles that then become the basis of real economic activity.
Tricky, tricky.

The second part of Tyler's argument, which is arguably more important, is spot-on. Basically, Tyler is saying that the unemployment measure isn't what it used to be, because these days the labor market is faster and people can fill up any vacant jobs at Target a lot more quickly than we could in the 1960s. This produces a lower measured unemployment rate, but that doesn't mean the recession isn't that bad: it just means that people that are unemployed can find SOME work.