|0:33||Intro. [Recording date: January 25, 2013.] Russ: I ended up at your website, mathbabe, somehow, I don't remember how; and I ended up reading a long post you wrote about Nate Silver's book, The Signal and the Noise, and your views on models and data, particularly the financial sector, how we should think about them. And those are topics that come up often on this program. Two things jumped out at me as I read your words: one is that we had very similar views about the problems on Wall Street. And the second was that we had very different ideas, radically different, about what to do about those problems. You're involved with Occupy Wall Street. Maybe I should be, too. Or maybe you shouldn't be. But there's something weird going on there. The first three-quarters of your post or so could have been written by me--though I don't know if I could have written it as well. And I just disagree with the last part. So, what I want to do in this conversation is to look at where we agree and why we disagree. And I want to start with your story, which begins of all places on Wall Street. How did you end up there, why did you leave, and how did you finally end up at the other end of town, you could say--at Occupy Wall Street? So, start with how you got to Wall Street to begin. Guest: Okay, sure. I was a mathematician. Ever since I was 14 at math camp I wanted to be doing mathematics, because I thought it was beautiful and clean and I liked the fact that you couldn't really disagree with the answer, once you knew it, you had the proof. And it was about as clean as you could get. But when I got to being a professor at Barnard College I realized that for various reasons it wasn't suiting me, my personality. The feedback loop was very slow; people sort of judged you not on your actual merits but on the reputation you had, or the fact that you are a woman--various things like that, that just enraged me. And I just realized I should be in business, I should be somewhere that uses mathematics because that's what I'm good at; I should be somewhere like where the metric of success is completely clear. And that's one of the reasons that working at a hedge fund attracted me. I didn't know much about--in fact, I was really quite naive about what hedge funds did. But, it was 2006, and I applied, and I was a professor of math and had papers published and I could solve all their puzzles. Russ: They love people like you. They do. Guest: Yes, they did seem to. And they offered me a job, and I took it. And I started in June 2007. And basically exactly right before the credit crisis started. I entered in June, and by August there were major tremors, like at D. E. Shaw, the hedge fund I was working at. And I sort of witnessed the crumbling of the world around these people in this hedge fund. It was amazing, an amazing sort of front row seat. And one thing I realized over the two years I was there was that there was nothing clean about it. The way mathematics was being used, the way the Ph.D.s were being trotted--I mean, they weren't being trotted out because there was actually no public face to the hedge fund, but the way we were sort of thinking about ourselves and valuing ourselves because of our mathematical background, our Ph.D.s in physics and mathematics. It wasn't like a rational, logical thing. It was more of a cultural decision. Let me try to be more precise about that. So, when you first go to a hedge fund, you might suspect--if you are really naive--that a hedge fund is actually supposed to find the correct price for the market. That we actually provide a service, and the reason we make so much money is that we are providing a service and of course we should make money if we are doing something good. Or, we're helping--another thing that you hear is we're helping--it's usually some of the same things--we're helping money where it should go. Russ: Allocate capital to its highest use. Guest: Yeah. Thanks. I spent four years in finance altogether. In the two years I spent at the hedge fund I don't think I ever heard someone say: Let's allocate this capital better. It was all about: let's anticipate what dumb people are going to do so that we can make money off of them. And there was this dichotomy, like dumb versus smart money. We're smart money; they're dumb money. We are so smart that we deserve their money. It was essentially kind of an entitlement. And it was really unattractive to me. I spent a lot of time at lunch trying to understand the mindset of, like, how does being good at math give us the right to do this? Because it's legal? That didn't seem right. And it was particularly jarring to go through this kind of discussion when the world was collapsing. When every kind of assumption that we were making about how smart we were actually didn't seem that smart. We were losing money. We were bleeding money. We had no idea why. There was just this complete cataclysmic event that did not follow any of our models. Our internal models to ourselves were: we are very, very smart; we are very, very rich; we must be, you know, God-like, because we are so smart. And it was just the overall thing, like the emperor has no clothes kind of event for me. And I just didn't want to be part of it. So in 2009, I decided, now that I'm sort of an expert on algorithmic futures--I was a quant in the futures group--maybe I should talk to the Commodity Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC) or the NY Fed and ask them if they want me to help fix this mess. And so I applied to all those regulators. None of them-- Russ: I'm glad to see that your innocence survived the hedge fund experience. Guest: Well, they weren't interested in me. It took me a couple more years to figure out why. Which is to say that they actually just didn't want to solve those problems. So, I still didn't know what exactly was going on with fixing the problems. But I knew that I wanted to be part of fixing the problems. And so the best job I could get where I thought I could be part of that was at a risk firm, called RiskMetrics, and I was put in charge almost immediately of fixing the credit default swap model for VAR, Value at Risk. And I worked for quite a while on that. And after a year, I thought I'd done a pretty good job; there were lots of caveats but I thought it was well-understood in the system, in the market, by the clients. Then I got put on a job where I answered the phone to the clients. And that's when my eyes really opened, and I realized that the too-big-to-fail banks, the clients of our risk firm, were using us as a rubber stamp. They weren't even looking at the numbers. And the only people that were seriously looking at the numbers, which were few and far between, were quantitative hedge funds--which, they were actually risking their own money. Or cared enough about the money they were risking to actually care about the risk. Like, the very people who really should be caring about their risk simply didn't care. And I realized that I could spend the rest of my life doing mathematically improved models, but if no one actually looks at the numbers, at the end of the day there's no point. And that sort of opened my eyes to a larger thing, which goes to my Nate Silver post, which is that a lot of the Ph.D.-like jobs you can get out there, in finance especially, are window-dressing jobs. It's basically a company where they open their door to the client and then they point to a back room filled with Ph.D.s working furiously; they say: Oh, don't worry about our product; you can have faith; we have Ph.D.s. And it goes two ways. On the one hand, the product doesn't have to be any good, because we already had the badge of authenticity coming from the back room. On the other hand, half the time the clients are also not--they don't care if the product is good. They're like: All I really need is to be able to tell my clients that I'm using products that have Ph.D. back rooms. So it's this crazy farce. And that realization made me just leave finance altogether, early 2011.|
|9:57||Russ: So, before we go on, I wanted to ask you just a little bit about the culture in those places and your reaction to it. Of course, it's easy to overdramatize moral and emotional issues after the fact, in hindsight. But my suspicion is that when you were at lunch and worrying about the things you said you were worrying about--were you kind of alone? Did you find any people who sympathized with your concerns? What do you think their attitude is toward these issues about smart money and dumb money, and just being window-dressing? Do you think they feel that way, or do they think you're crazy? Or do you think they are self-deceiving? Guest: Well, there's a few issues. First of all, I want to say that I never witnessed any actual illegal or criminal activity, at D. E. Shaw. What was unappealing to me about being there was the arrogance and the greed and the mindset that I discussed. Not everyone was as intense about this idea--we're smart, so we get to take money from stupid people. The thing I really want to mention, though, is the people that were most intense about this were people who honestly seemed to me--I mean, I pitied them. I don't want you to think it was like an intense and negative, hostile conversation. It was more like me realizing that these people were actually afraid. They were like somehow afraid--I sort of think of them as survivalists at this point. They probably have land in Utah somewhere. They were like actually worried--and would say so--that the whole system is going to break, any second, and when it breaks, I'm going to have enough food and I'm going to have enough money for my entire family. We're not going to have to worry. So it was kind of a bunker mentality. And I was definitely--I stuck out like a sore thumb, for more reasons than one. Number one, I was a woman--I was the only female quant there. I was one of the few people that had children. And I also was one of the people that was hired later in life, so I already had developed my own kind of--I totally had developed a personality. And moreover, as a mother, I was used to being a person that created culture; and the culture there, like if you sent absorbing young men into the culture, men are sort of chameleons inside a culture and I was just simply not having that. So I never sort of felt at all like I fit it. I just want to throw one last thing in there, which is that having spoken to a few people from D. E. Shaw, even the ones I disagreed with, none of them actually ever felt like they fit in. I think that was one of the characteristics of working at a hedge fund, that the competition inside the workplace is so fierce that everyone kind of feels like an outsider all the time. Russ: Yeah. There is a certain macho swagger--at least, that's the reputation such places have. I have a few friends who work in that industry; at various times in life, they've had that swagger. Maybe they always do. I don't know. But it's certainly something I think is harder when you are younger, and, as you say, if you don't have children, you are a different kind of person than someone who is older with children. Male or female. Guest: Yeah. And I also was Larry Summers' quant when I was there. And he's a pretty fierce person. I guess one of the things about me is that I'm not intimidated by people. So, for me it was like an opportunity to study like major league macho behavior up close. But he didn't even impress me among the people I worked with. He was kind of middle of the pack in terms of macho behavior. But that's the kind of thing I'm talking about, where people were constantly posturing and trying to be as clever as possible and trying to best each other in conversation. Russ: So, lest our listeners accuse you of a holier-than-thou attitude or sour grapes, do you want to say anything good about it? Guest: Yeah. One of the things I loved about it was the care of statistical modeling. It's a craft. And they really taught it to me. And I really enjoyed that. Intellectually it was very stimulating. And that's one of the reasons that, when I left finance altogether, I started my blog. Because I thought to myself, it's almost like a guild--like you go into finance, you learn the craft of being a quant. Like a guild. But why should it be closed? So, I resolved to open up some of the statistical methods. And I've been doing that on my blog. And I've also been doing that as being a data scientist. Once I left finance in 2011, I needed to figure out what to do with myself and how to make money. So, I got a job as a data scientist in tech. And I realized that a lot of the quant skills I had developed were very translatable into modeling[?], not with financial data, with time series data, but rather into cookies, trying to predict whether people are going to click on an ad, and whether they are going to purchase. So that stuff has almost the same underlying statistical methods. Russ: Sorry, I lost you. You said "translated into" what? Guest: To translate my quant skills into data science skills. Russ: Now, one of the things you said that is a little bit horrifying, but not particularly surprising--to me, and maybe it's my bias--or yours, so I'd like to hear you clarify it, is: You said when you were answering the phone that you'd get these calls from the clients, the too-big-to-fail banks, and you had the feeling they didn't really care about the data in the models. They just wanted to hear the answer and move on. Obviously that could be because they're not sophisticated enough to understand it. That's what they're paying you for. Could you elaborate on that and why you think that was the case. Because usually when you sell somebody something, they want to make sure it's good. They're paying for it, after all. So, where does that feeling come from and what do you think was going on there? Guest: Well, that feeling came directly from the kind of questions that the people who were in charge of the risk reports from the too-big-to-fail banks would ask when they called. They would ask questions like: could you make this font bigger? Could you change this from blue to red? They'd care about the look of the report rather than what the actual numbers were. And moreover, there were models they used that we later found out were broken and were giving actually nonsensical numbers, but they didn't notice. We found out because one of the quantitative hedge funds tried the model and said, Oh, this model is even worse than it used to be; we're not using this. And we were like, Oh my God, other people are using that model; they've never noticed. You definitely get a lot of evidence when you are on the phone with the clients. You get a lot of evidence about when they are looking at the actual report. As for why that's true, that's completely clear. The taxpayers bailed out the banks; they're massive; no one actually understands the portfolios involved. By the way: not all the portfolios were even on the system because they had just too much stuff going on at those banks. And a given person in a risk office does not feel personally liable to understand what's going on. And that was clear. And why should they?|
|18:40||Russ: And that to me--those incentives are the root of the problem. If you don't have the incentive to pay attention, you won't. So, that's kind of straightforward. Although others may argue it was just simply a failure of command and governance. We can get into that maybe a little bit, but let's move to your comments on Nate Silver. I don't want to pick on Nate Silver. I've asked him to be on the program and it hasn't worked out; maybe it will down the road. So, we're not going to pick on his book per se. But he's not alone in arguing that the financial crisis was to a large extent simply the challenges of modeling complex phenomena, like various Wall Street products. It's just a question of doing it better; we've just got to put our nose to the grindstone and we need more data; and the people who built those models were well-intentioned. You think that's the wrong perspective. Why? Guest: I do. So, two things. First of all, it's a common misconception that bad models created the financial disaster. In fact, corrupt financial institutions forced the models to be bad. Because the corrupt financial institutions had the power over the quant teams and over their work and basically would not allow for a model that did not give them what they wanted to see. So it's almost a completely cause and effect being confused there. So, that's one thing. And I can give examples of that. The other thing is that yes, I agree that there's no reason to pick on Nate Silver. It's a common mistake that people make, and Nate Silver made it because he is essentially an expert in sort of finite game strategies. Finite game--by that I mean something like baseball or chess or poker, or even polling, where you know exactly what you are trying to do and you know if you've succeeded. And you've succeeded if you've won the game or if you have a statistical edge over other baseball teams. But the actual data--there's just no question about what the data is. Like, we all know whether someone actually got to first base or not. It's publicly available. On the one hand the data is publicly available, results are completely are completely clear--you either won the game or lost the game. Russ: There's some complexity about defensive fielding statistics, pitching, fielding, luck. There are issues, but-- Guest: I'm not saying it's easy. It's clear whether you are successful. If you have a statistical edge over somebody and pick better triple-A players--over time. And there's no proof in statistics, there's only evidence. But over time it can be in evidence that you have a better system. And everybody knows it because those people actually cause you to win more games. So, I'm just pointing out that the metric of success is kind of public. The metric of success is win or lost games. And similarly in chess, you win the game or you lose the game. And in poker, same thing. In polling, you predict what's going to happen in the poll, in the election. So all these are kind of finite games where your incentives as a modeler are to be as accurate as possible every single time. Whereas in finance--and this is where he sort of--Nate Silver and other people--generalize to a place where it's not a finite game, it's actually an incredibly complicated game inside a political system with lots of pressures--in that system your incentive as a modeler is not necessarily to be accurate. Your incentive can be to not get fired or to get a big bonus. And that is often, in fact, what your incentives are. So, for example, if you are talking about credit rating agencies, modelers, their incentives were clearly to come up with a rating that they were being paid to give. Russ: How surprising. One of the strangest aspects of the financial crisis is the people who argue that it's the rating agencies' fault because they rated junk highly. That was what they were paid to do. Why would you expect them to do otherwise? And they were paid to do that because partially, the government created a monopoly--a duopoly of rating agencies basically, and then privileged through regulation certain types of assets that got certain types or ratings, which allowed you to be more leveraged, such as AAA. There wasn't enough triple-A to go around. So, that's life. Because AAA means really safe, and by definition there's not a lot of really safe stuff. So Wall Street found a way to invent really safe stuff, which is very clever. But they needed somebody to stamp it. And so they found them. It's kind of straightforward. Guest: It really is. And you said it better than I. I just wanted to add one other thing, which is that they get paid by their clients, rather than by some third party-- Russ: Right-- Guest: For some true rating. Russ: Who would be so stupid as to think it's an objective rating? What savvy investor would trust those ratings given that the incentives were to pay them for--the client paid for them. Guest: No, agreed. Agreed. So really, we're agreeing. Really, what I'm calling for with this post and with many other posts on mathbabe, is for people just to be more skeptical. To be more skeptical of systems. Because in my opinion, systems, like the Federal rating agency within the financial system--they are models. In some sense; they are not mathematical models, they are political models. But they are modeling, like, how can you make a financial system with trust, so that you don't have to do your own due diligence? So that's what that model is. And it's a bad model. It's really misleading. But I would also like people to be skeptical of the underlying math models. They should understand that it's all about the incentives in the system. That the underlying math models might be bad, but there's a slightly larger model within the system that's actually working very well for some people. So, for some example--we already did the credit rating agency. The credit rating agency model relied on poor mathematical models, but the larger model was: These bankers sell this crap with good ratings, and they get paid, and they send some of that money back to the credit rating agencies. So that was a successful model if you are in the larger definition of models, to allow for political models. It's a success for the bankers, who still have that money that they got bonuses from. And it's success for the credit rating agency--as long as it lasts. And now they have--some people might say they have lost because of the reputational risk that they took on and they look bad, but there still exists--you know, the system hasn't even been changed. It would actually be a good thought experiment to try to say what it would mean for a model like that to fail. The banks still exist. The credit ratings still exist. And the whole system is still intact. And that brings me to why I'm in Occupy. I'm in Occupy because it's bad enough for us to realize in retrospect how much we should not have trusted the system, which we did trust; how much more skeptical we should have been. But it's another thing altogether to allow it to continue to be so ridiculous and not to now demand a better system.|
|26:50||Russ: I just want to add a footnote to that. Which is: even executives whose banks got swallowed up, such as Jimmy Cayne at Bear Stearns--you hear, he lost--at the peak of the market he was worth about $1.5 billion. With a 'b'. And then after the crisis, when Bear Stearns was sold to J.P. Morgan Chase, he was stuck with a mere $500 million. So the claim is he lost a billion dollars. So obviously he paid a price. But he didn't plan on losing a billion. And Jamie Dimon didn't. Other people who rolled the dice didn't. And the point is that in the run-up, he got to keep $500 million. That's really not a bad day. And he says so. He says you can't think about anything awkward about his lifetime achievement when you can pocket $500 million dollars. So his price--it was a pretty good deal for them, those who "lost". And those who gambled and won--not only do they get to keep the billion plus, but they get to swagger and feel good like they did, and feel smarter than those other people. And that was the game they were playing. There were some winners and losers, but the losers aren't on the Street. Five hundred million is not on the Street. It's a pretty easy life. Guest: Yeah. And it's continuing now. Look at Jamie Dimon, who apologizes for the London Whale, and then says, Oh, but we had record profits this quarter so everything is okay. He didn't actually say that 'everything's okay' part; I'm throwing that in because that was an implied idea. I just want to say to Jamie Dimon: No, the fact that you guys have no controls and that you are highly profitable is exactly consistent with the system not being fixed and with the taxpayer bailout continuing. Russ: He's gambling with my money. And yours. Guest: And he got into trouble, which means he only got $11 million instead of $22 million this year. Thank you. That's a serious punishment. Russ: Explain what the London Whale is, and I want to comment on that. Guest: So, there was an office in London called CIO, Chief Investment Office, part of J.P. Morgan Chase, that was supposed to literally just prevent--they were supposed to hedge their portfolio. So, to prevent losses in the bank. That was their only job. It was supposed to be the safest office in the bank. And instead of being safe, they actually lost billions of dollars. I don't even know what the current amount is--something like $9 billion. With a 'b'. And they basically cornered a part of the credit default swap market, and people realized it. It doesn't even really matter, like, what. And by the way, it also doesn't even matter whether that was intentional or not. Like some people claim that the Dodd-Frank Bill might have made it a little bit harder to make proprietary trades, so they were hiding proprietary trades in the CIO office. That's possibly true. I would give that a 75% truth. But it still doesn't matter, because it just shows you that there's no controls in that bank. That Jamie Dimon does not have control over his bank. And that no too-big-to-fail bank is small enough to be understood and to be controlled. But moreover I'd like--the scary part of it is--I would love to stop thinking about Jamie Dimon since really he's a jerk and I'd love to stop being in charge of being in charge of that guy and all of his jobs-- Russ: And why should you? You could argue he lost $9 billion dollars of his money; that's his problem just like any business that makes a bad decision. That's the whole beauty of the business world. You make good decisions, you make a lot of money; you make bad decisions, you lose money or you go out of business; and that's their problem, let them fix it. Guest: Yeah, right. And if we had a world where we could ignore people who take on jobs that they can't do, or in fact that no one could do, I would love that. But that's not where we are right now. Instead where we are is that the United States is bending over backwards to foam the runway for the banks to resolve their problems. And we are stuck with the bill if they screw up. Which they do, consistently. And we also can't--by the way, this is going to the HSBC debacle--we can't actually punish them when they do criminal activities. That's our stance, anyway. Russ: What's the HSBC debacle? Guest: So, HSBC is a bank, I think it's the largest European bank. It has recently been, it has been agreed, that it has been laundering drug money as well as terrorist money, for the last 10 years. And the U.S. government sort of slapped it on the wrist with a large fine. The fine itself is being paid by the shareholders and is not enough to actually, compared to the amount of profits that they made on the actual deals; and moreover, no one is going to jail. So that's an example of our government sort of throwing up their hands and saying: If we actually try to get you guys in trouble for doing this criminal activity, then we would be threatening the financial stability and we can't possibly do that. Again, the point is that we don't deal with the actual problems when they occur. But we also ignore them after they've occurred. We don't fix the actual underlying problems. And the biggest underlying problem is how big these things are, how interconnected they are, and how, when the next problem comes, we won't be able to handle it. 3311 Russ: Well, we've created, through public policy, an incentive for them to get big and to become entangled. In a different world that would be a bug. It's a feature right now for them. And so everything pushes--I'm not saying there is a sinister conspiracy. Every once in a while I wonder if there is, but I'm not saying there is. But the natural incentives, the political processes put in place, have been encouraging both size and entanglement. I just want to say--I say this every once in a while but I think it's important to say it again: I'm a capitalist; I love profit; and I love loss. And profit without loss is the most destructive thing you can probably imagine. And so a political system that has banks that make money at our expense as taxpayers and don't bear the losses is pretend- or crony-capitalism, and faux capitalism. And those of us who love capitalism shouldn't be defending their right to make profit, or defending them by saying, well, they are just playing by the rules. They help write the rules; they help make the rules; they influence the rule-makers as much as they can. And we can debate whether they are immoral or not, or evil, or dark, or unethical. All those things. Or even something minor, like jerks. That's not the key issue. To me the key issue is: The system itself is not healthy in the way that capitalism should be. And don't defend it. Those of you out there--they are going to destroy it. So I think it's important to expose it for what it is, not pretend it's something else, or it's almost capitalism. It's not. And so even though I'm not in favor of breaking up the banks, to me breaking up the banks would be better than the current situation, which is: fake capitalism where they make money at taxpayers' expense. And by that I don't literally mean just the bailouts. It's the opportunity to borrow money at low interest rates, be highly leveraged, which are things that wouldn't exist in a normal free market. So, I think that's just incredibly important for those out there who are "on my ideological side."|
|35:21||Russ: Now, Cathy, you are not on my ideological side, so I want to move to the next issue, which is: Occupy Wall Street. Those of us who are not sympathetic to the entire idea of it--although I might be sympathetic to parts of it, as I just said. I don't know much about it. We see them on TV. It looks like a camp out experience. But that's not exactly what it is. So talk about what it is and why you think it's important to continue it. Guest: Okay. So, I just want to throw in, just referring to the last comment, which is that I'm okay with either breaking up the banks or forcing the banks to be utility banks. I think we agree almost completely on the problem with the banks right now. Russ: Well, my preference right now would be to just stop bailing them out and stop subsidizing them through artificially low interest rates by the Fed, and stop having them serve on the Fed's boards. And let's get to real capitalism. My tolerance for breaking them up or making them utilities--that horrifies me. But not as much as the current system horrifies me. That's my only caveat. Guest: So, what would you have? You would have them fail, but where people weren't getting their payroll. What would--I mean, there would be problems. Russ: Yes, there would be. There would be pain. There would be pain and suffering, and just like we have pain and suffering now, the question is who would pay for it and how long it would last and whether it would repeat. So in my view the current system is poised to be a continuing boom and bust of irresponsible decision making. And I would add--this part is equally depressing and hidden, equally hidden--which is that as we joked about earlier on that you didn't feel like you were allocating capital to its highest use, we have a system that explicitly allocates capital not to its highest use. We've just spent trillions of dollars building more houses and bigger houses over the last 10, 15 years. Bad idea to incentivize people to do that. We helped create that incentive through a whole bunch of public policies. That makes us poorer. Capital is scarce and valuable, and we treat it badly. So, I believe that--I agree that the transition from this current world we are in to a better world is not going to be painless. Unless you could make a credible promise, which is going to be hard to do. And I'm not suggesting that politicians could do what I'd like them to do. But that would be my preference. Guest: Interesting. I'm interested in that idea. I think the difference between you and me is that I worry about--I worry more--let's say it this way; you can disagree. I worry more about the average person who has nothing to do with the financial system, has nothing to do with that mess, and is not going to get paid. And by the way, the system as it is now just sucks. In going to Occupy, I am--first of all, there is a lot that happened at Occupy even in the encampments that people didn't see. Because clearly--this should make sense--the people who didn't have a whole lot of time, who had jobs, who had children, such as myself, we didn't have a lot of time to spend at Occupy. Didn't sleep there. I went there, had discussions with other people. It was a place for people to meet who did not think that the current system was working. In that sense, it worked extremely well. Other things about the encampment were not successful, and there were a lot of people who were just there for free food. But what it did very well was create a central location for meeting like-minded people, and in that sense just created a network of people who wanted to think about this, wanted to discuss this. And I think it's a continuing--you know, we don't have the encampments any more, but we have a continuing mindset. The mindset of Occupy is perfectly exemplified by Occupy Sandy relief. Occupy Sandy sprung up because there were enough people who still had that idea, like, we can't wait around for a corrupt system to come help. We are going to do what we need to do as human beings with moral purpose, at this moment, right now. And that's what happened. And that's the beauty of Occupy. And even if its name gets changed, it's going to continue in my generation and the generation that's younger than me as this is something that has nothing to do with corporate America, this is not government controlled, this is because it's a good idea, we are doing this. So, for me, Occupy is kind of a wonderful thing. It's a little bit of a hippy thing. But that doesn't mean it's a bad thing. Russ: So, why would I, as a--I just have to mention, by the way: I think we're equally concerned about average people. I think the current system, over the last 10 years, had a brutal effect on average people. It encouraged people to buy houses that they thought they were going to be able to pay back, and they couldn't. Loans they couldn't pay back. Destroying savers' incentives to save. Making people poorer in all kinds of ways and it ultimately ended up in a recession that pushed unemployment over 10%. So, I don't think we disagree. I think we might not be equally confident on the benefits or costs of various policies to get us to a better world. But let's go back to Occupy. So, you go to regular meetings, still, correct? Guest: Yes. We have weekly meetings for the alternative banking group. Russ: And what do you do there? Would I be happy there? Or would I be uncomfortable. Guest: I don't know. I think you'd be interested. I would be interested in having you. We talk about latest outrages; we talk about HSBC; we'll come up with events, planning. We have various audiences for our group. We've been putting a lot of public comment letters together for the Volker Rule and for general Dodd-Frank issues. We've been writing letters. So, for public consumption, to the Senators, asking them to get a good Treasury Secretary, something that doesn't represent the banks. We're trying to set standards that I think you could get onboard with. As you said: let's not have the people who are in charge of the banks also be in charge of regulation. That kind of thing. And we talk about how we can educate people. To some extent I really think that education portion is over. I really haven't met people recently who don't understand that the financial system is corrupt. They seem to be doing our job for us. In the sense that we want to talk. In two senses. The first is that we want to explain that the system hasn't gotten better. And we don't have to because, you know, HSBC news comes out. And most recently we've heard that Deutsche Bank is getting in trouble for manipulating the energy market in California in 2010. These are things that happened way after the London Whale. Way after the credit crisis. So there are just example after example of things that are happening now, so that we can see that the system is still messed up. The other thing is that it's no longer an Occupy issue. I read articles on Bloomberg and the Wall Street Journal on a daily basis that I did not read 5 years ago about the moral bankruptcy of the current system. So, I feel like the education part is somewhat--we could put a little check mark next to that. I think what we are trying to focus on in Occupy is: What do we do? How do we--what are the pressure points of policy makers? How do we get the average people to feel empowered to demand change. We had Sheila Bair come talk to our group; we've had Neil Barofsky come to our group. I'd love to get Elizabeth Warren come talk--she claims to be the godmother of Occupy, so I'd love to talk to her. We want to hear from those guys, in terms of--they are insiders to Washington. Like, how do you actually get something done? I know that's a huge question; everybody would like to know the answer to that. So that's one issue. But the other issue is: How do we get the 99% to not just be disgusted with the system but to make a better system?|
|44:15||Russ: Yeah. Well, I interviewed Neil Barofsky for EconTalk, and we talked about your naivete a little earlier and he displayed his as well. He displays it in his book. He went to Washington and actually thought that the people who worked there would be trying to make the world a better place. He found a lot of them mainly cared what their office looks like. I think--obviously there are interesting issues here of, not tactics, but what can be realistic about fixing a system where all the incentives are not so healthy. It's easy to say: We just need to change the incentives. But the people who are in charge of changing those incentives kind of like the current system. It serves them. And it's not obvious how you solve that. One way you solve it, it seems to me, is outrage or disgust. I'll half-agree with you about the education idea. I do think we've made some progress on education. But I'd say one of the groups we've made the least progress with is my profession. Economists generally--there are exceptions, obviously--but a lot of economists think that the bailouts were a good idea. That we didn't have a choice. That we shouldn't endure any pain. That the Fed is necessary, that the Fed does crucial work in keeping the crisis from spinning out of control. And of course economists, I think, are compromised in their ability to speak openly and honestly about these things because they have a financial incentive like everybody else, most of them, many of them. And so, I think the attitudes of the average American are going to make it harder for the next generation of politicians and Secretaries of Treasury to send goodies to Wall Street. But a lot of the elites are very tolerant of what Presidents Bush and Obama did. And I think what they did was awful. And so it's interesting to see whether the combination of Occupy, Tea Party, and the people who aren't paying attention at all--which is most people, obviously--whether they'll support policies as we've had. You know, when Hank Paulson said the world was coming to an end if we didn't get the Troubled Asset Relief Program (TARP) money, I think it scared a lot of everyday people who of course can't pay attention enough to know whether he's telling the truth. And to be honest, I have no idea whether he was right. Of course, they didn't pass it right away; the world didn't come to an end. But we still passed a horrific bill with all kinds of bizarro stuff in the middle of it that had nothing to do with the financial crisis. Guest: Wow, there's a lot there. I don't want to say about economists is that my experience with economists is that they don't actually understand how the financial system works. So, of course, it's easier--as you said, they also have their own incentives to keep the status quo. It doesn't surprise me, considering those two things at the same time. Why even learn how the financial system works if you are going to learn that it's impossibly complicated and you can't expect it to just continue as is? So, they are left sort of with an enormous amount of authority, not much understanding. And so the best they can do is make these meta-economic models that they have very little economic evidence for. And I don't want to dismiss all economists all at once. But that's sort of what you see a lot, is the way I should say it; and what you see a lot at the same time is economists saying: Oh, yeah, the banks are as bad off as they were, and our economy is slowly getting healthy. There's incredibly surface descriptions. The metrics of health. Russ: Yeah. It's naive, too. Guest: It's very naive, because what you have is a festering wound underneath the surface that is being fed by the Fed. The rates, and stuff. It's only even moving, it's only alive because of these drastic measures we are taking. We're keeping something that should be dead, alive. And we're looking a few feet above ground and saying: Hey, grass is growing, really slowly, and that's good news. I don't see much good news. And I sort of see economists as a whole as just simply--their job simply is for the most part to talk about how good the news is. Russ: I think we're the physicists[?] in the back room for the political process, actually.|
|48:52||Russ: Let's close by talking about experts. You criticize Nate Silver for--he wrote the following:|
This is neither the time nor the place for mass movements--this is the time for expert opinion. Once the experts (and I'm not one of them) have reached some kind of a consensus about what the best course of action is (and they haven't yet), then figure out who is impeding that action for political or other disingenuous reasons and tackle them--do whatever you can to remove them from the playing field. But we're not at that stage yet.So, that viewpoint I think is a very common viewpoint: We just need to get the smart people in charge and we'll get this thing fixed. And you obviously disagree. Guest: Listen, I'm smart. You know. One of the reasons I disagree is because I'm smart and I don't know what to do. And I know a lot of awfully smart people who don't know what to do. And I know a lot of slightly less smart people who claim to know what to do. So really what it comes down to for me is, I want there to be a strong way of asserting: I don't know. I want there to be like a really macho approach. Because I think macho is kind of a key element in all this. You know, you don't get listened to unless you are screaming. You get listened to if you are screaming the world's going to end or the world's going to be great. That's what's called 'news.' Russ: Or: I have the answer. Guest: I have the answer. And if you are saying: I don't know the answer and we have to think about it, and we have to make sure the incentives are right and we have to make sure that the average person is protected from starvation, and it's going to be hard, and the people who are in power now are going to have less power and they are going to have less money--that doesn't sound like a very, you just don't get play on that. But I do think that the 'I don't know' somehow needs to have more cultural weight. And I think part of that is--starting this, that's how I've chosen to start. I've chosen to start by saying: Distrust the expert. To be a skeptic. I want to first promote skepticism. Because once people sort of look under the covers to these mathematical models or whatever other models--political models--they realize that people are inside those. The systems are simply acting in their own best interests, almost all the time. And then people will start saying: Wait a second; that's not working. What should we do? And that's when they'll come to--in an ideal world they'd come to this moment of: I don't know. And they'd admit that they don't know. And we'd actually get somewhere with our conversation. Russ: Well, 'I don't know' is sort of the watchword of this program. As long-term listeners know. If you want to dress it up a little bit, you can dress it up in Hayek's 1974 Nobel Prize address, "The Pretence of Knowledge." I think there's a lot of pretense of knowledge. When you said that about admitting you don't know I was reminded of "The Second Coming," by Yeats. We don't get to quote Yeats much on this program, so I'm going to read the first verse.
Turning and turning in the widening gyreAnd that last line of that verse, "The best lack all conviction, while the worst Are full of passionate intensity," that to me is a big problem we have with experts. Guest: Yeah. And we have a lot to do. We have a lot of skepticism to sow. And then we have a lot of coming to the realization that we have to rethink this. And then we have a lot of work to do to actually fix it. And it's going to be interesting to watch. Personally, I think it's not going to really start happening till we see another crisis. Russ: I think that's plausible. The only interesting question for me--if that crisis is 25, 30, 40 years away, I don't think it will have much of an impact. If it's 3 months, 3 years away, I think it will have a huge impact. As well as this lingering economic mediocrity that we've got right now. The high unemployment rate I think is part of the problem and part of the signal that people are taking that things are not healthy, though people might say they are. Guest: I've got my eyes on Spain. Russ: Why? Guest: Well, I just feel like there's kind of two universes. And it's not just Spain, but Spain is where I'm looking. The diplomatic economic leadership universe, where they constantly have meetings. And then there's the street. And it's a totally different place. Like, agreements that you make up in the diplomatic regions, what does that mean to a person who doesn't have a job, did everything right, went to college, can't get married and have children, and can't find a job. What does that mean to that person? Russ: And you mentioned Spain because their unemployment rate is 26%, I think? Guest: Right. Exactly. Huge unemployment rate, even worse. And I just feel like that's going to blow. And that's going to have a lot of repercussions. I don't know when, though. And I don't know it's going to. I guess my feeling is that it's worth keeping a watch on. Russ: Well, those diplomatic meetings, those politician meetings you are talking about, of course those are exercises in pretending that you know everything and you have to put the brave front on it and smile and say how it's going to work out, and everything's fine. You are reassuring constantly. Guest: Illusion of control, illusion of understanding. Russ: So, for me the lesson is we need a different political system. One where there's less power for those people and more power out here. That's also where I think my views and your probably dovetail, but we might have a different ideal of what that might represent. Guest: Yeah. Russ: You want to say anything about your ideal? What would be your ideal relationship between, say, government and the financial sector? Guest: Well, I don't know exactly how it would look, because I actually have--I don't have a specific framework in mind. There's plenty of frameworks that I would be happy with. Let me characterize frameworks I would be happy with: One where there's actual separation. So, Sheila Bair actually came up with this idea as a demand for Occupy, which I think is a good one, where if you work as a regulator, you never work as a banker. Like there is a strict line. And you've said: I'm a public servant, I'm working for regulation, and I'm never going to go work for the bank. Because the revolving door is an enormous problem. Russ: This is the Bair Rule. Guest: And the lobbyist of course is a different kind of revolving door problem, where you have people working on the behalf of the banks and then they have lots of connections with politicians. So, they could be ex-politicians, for example. And there, I would love to see much stricter rules on how much money banks put into lobbying. Actually, even better, I'd love to see banks say: Hey, nobody trusts us; they think we're bad guys? We're going to stop lobbying. We're not going to put any money into lobbying. That would go a long way toward helping me start forming a trusting relationship with banks again. Russ: Yeah. Guest: I don't see that happening.
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
|57:01||Russ: Shame would be a good thing. And it's remarkably scarce in modern America. Guest: Right. So, bring back the shame. For me, Occupy is a moral issue. And that's why--I would consider myself kind of a perfect person to talk about the emptiness of mathematical modeling. As a mathematical modeler, I can tell you it has nothing to do with morals. You can model anything you want. And you can make it fancy and you can make it Markovian and you can put uncertainty into the model and make it sound like you've done all sorts of things. But in the end, we're trying to make decisions about people's lives. And it's a moral decision. It's not a mathematical decision. Mathematical models are for the most part not useful and shouldn't be used. Russ: I couldn't agree more, in the sense that it is possible that the best solution to all of this is better morality. More shame. Less exploitation of the system. I know the incentives are otherwise, but we don't respond to every incentive that we have. It's sometimes a bad idea to do that. It may be natural, but it's not good. And it's by far the cheapest way, to monitor bad behavior is morality. Guest: We have to depend on people to be moral. Russ: Say that again? Guest: At this point I'm no longer willing to assume that people will act morally. Russ: Oh, I couldn't agree more. But if I want to think about what might lead us to a better world, it would be a world where people felt guilty about exploiting such a system as we have. That would be much better than trying to change it politically. And just a different approach people like you and I might think about as a way to make the world a better place. We're always thinking about the political solution, either more government or less government as a way to make it better. And some of what we need is, not better human beings, but human beings with maybe a culture that we inhabit that maybe would have more shame and guilt at taking advantage of other people. Guest: And by the way--I don't want us to be too idealistic. My new thing, you know, having left finance I now work in the Internet tech scene. Modeling there is potentially even worse than the financial modeling, the financial crisis. The potential for affecting people's lives negatively and the predatoriness of the modeling, and the secrecy of it, make it--it's a kind of a really toxic combination, in my opinion. Like on the one hand, you might have enough public outcry from Occupy and Tea Party and other people about bailouts. I can't imagine a world where the bank CEOs in the too-big-to-fail banks say: You know what? We're cutting ourselves down to size and we're not going to do lobbying any more. I can kind of imagine that. But I cannot imagine is the people who work on the dark side of information warehousing on the Internet, that are selling information about people to make a quick buck, saying: Oh, I shouldn't do this because it's not a good idea. That's not going to happen. And that's where we might really differ. Because I am calling for strong data privacy laws to disallow that kind of behavior. Right now there's basically no regulation on information on the web. Which means you can buy a persona of a random person from a data information seller. And that person has no legal justification to prevent you from doing that. Here's an example. If I'm an insurer and I want to do the best job I can in pricing somebody's benefits, or policy, I'm going to see what they've been searching for. Have they been searching for HIV treatments? Have they been buying wheelchairs? Like, I can figure out a lot about somebody from looking at-- Russ: Ordering a lot of french fries from Peapod. Guest: Exactly. Buying cigarettes or something. The point is, at this point there's no pushback to exploiting people's private behavior. And that would be one thing if it was just: who do I want to offer a deal for going to Miami on United Airlines? Which most people think about when they think about this kind of segmentation modeling on the web. But when it comes to things like insurance--it actually defeats the purpose of insurance, which is supposed to be pooled risk. If as an insurance provider, I can actually pinpoint how risky you are, and I charge you accordingly, then I'm going to be charging the very people who need insurance the most. And it won't be insurance any more. Russ: Well, I think that's a long and interesting topic maybe for another time. I do think, though, that your point about skepticism, about the ability of people to self-monitor their misbehavior, is probably correct. And it ties into the earlier point you made, which is: If we had a little more transparency and education about what's going on, for the prominent people at least, there would be some hope of shame. Rather than those folks getting honors. So, I think that's where maybe there's some hope. Guest: Yeah. Well, I'm not going to wait too long for Jamie Dimon. I just don't think that guy has shame.|