An Evening with Fancy Bankers

Chris Sturr, D&S co-editor, here.

A few weeks ago I received an invitation to attend the “1,954th Stated Meeting” of the American Academy of Arts & Sciences, on the topic of “Prospects for the Economy.” The featured speakers were supposed to be John S. Reed, former Chair and CEO of Citigroup and former chair of the New York Stock Exchange; and E. Gerald Corrigan, Managing Director at Goldman Sachs Bank USA (the holding company of Goldman Sachs) and former Prez. and CEO of the Federal Reserve Bank of New York. They were to be introduced by James M. Poterba, Professor of Economics at MIT and President of the National Bureau of Economic Research (and also a member of the NBER committee that dates the business cycles).

The event happened last night. As it turned out, Corrigan couldn’t make it, supposedly because he was “stuck on the tarmac” at a NYC airport, but one wonders whether his absence had something to do with the SEC filing suit against Goldman Sachs today.

The Academy, which dates back to 1780, included George Washington, Thomas Jefferson, Alexander Hamilton, and Benjamin Franklin as early members, and has included 200 Nobel laureates as members, according to Wikipedia. The vaguely Japanese-style headquarters is on a wooded campus of several acres in Cambridge, right on the border of Somerville, about a fifteen minute walk from Harvard Yard.

As soon as I got the invitation and accepted via email, I sent an email around to D&S folks to see what I should ask the “fancy bankers,” if I got a chance to ask a question. D&S collective member, author, and economist Alejandro Reuss provided the suggestion I liked best. He thought I should ask thme: “Do you think financial markets and financial institutions have done a good job of allocating capital over the last couple of decades? If so, what on earth would count as not doing a good job?” Unfortunately, I didn’t get a chance to ask my question in person, but I may get an answer to it yet.

The crowd was overwhelmingly white—I saw no black people whatsoever, and of three non-black non-white people, two were serving snacks and wine. Maybe 20% of the audience were women, and among audience members I think there might have been three or four people younger than me (and at 43 I’m not all that young); the median age might have been 60. There seemed to be lots of important people.

Here’s what happened: Milling around the snacks, I met a nice older gent, a George T., who is an investment adviser in Belmont, a relatively ritzy suburb of Boston. He confessed that even though he is a life-long Republican, he is pretty disgusted with the results of banking deregulation. We chatted during the reception and sat together during the talk. (At the end of which he whisked me up front to introduce me to Louis W. Cabot, Chair of Cabot-Wellington LLC and Interim Chair of the Board of the Academy, and I think former head of the Brookings Institution, who had officiated at the whole event.)

I got a better impression of John S. Reed, whom I’d been prepared to dislike, than I did of James Poterba. Reed gave a short talk on the economic crisis and the recession. He downplayed the role of declines in consumer expenditures and personal disposable income in the downturn, claiming that both of these had already returned to where they were at their previous peak (which is hard to believe–I’m going to try to get my hands on the charts in his slides to confirm his numbers). And he downplayed the role of the subprime crisis per se, saying that the banking system was so over-leveraged that if the mortgage crisis hadn’t precipitated the financial crisis, something else would have. He identified the precipitous withdrawal of business investment in the wake of the financial crisis as what most accounted for the downturn, and he also cited (but slighted, as a couple of audience members pointed out) the massive jobs downturn.

He said he was “fundamentally optimistic”; he predicted a “V-shaped” recovery, given that consumer demand is strong (contrary to “conventional wisdom”), exports are doing well, and he expects that business investment will pick up rapidly over the next couple of quarters. (As audience members pointed out, here’s where his slighting of long-term unemployment is problematic: can the recovery be considered “V-shaped” if unemployment says near 10% for as long as it is likely to, and long-term unemployment continues to be a problem? He wondered aloud why this was “conventional wisdom,” but he also didn’t really seem to care–massive joblessness didn’t seem to dampen his optimism.)

His two caveats were (a) that the Fed would have to be very careful extricating itself from the the monetary stimulus (e.g. super-low interest rates) it has set up (and the same would be true with governments globally); and (b) that he thought we could definitely expect a dollar shock, making it difficult for the U.S. to issue debt, over the next five years. Could it happen in the next five months? Who can say? he said. He likened the coming dollar shock to an earthquake in an earthquake-prone region: it is “predictable but not forecastable.” [Keep your eyes out for a feature article on the dollar and the U.S. trade deficit in our May/June issue.]

What made me like the guy more than I thought I would? He said fairly forcefully that the criticism bankers were facing was justified, and he said they should be held accountable (though he didn’t say how–confiscation of their wealth or imprisonment are probably not what he would recommend, alas). And in response to a question about what kind of (re-)regulation was warranted, he made some pretty interesting remarks. He admitted first of all–pretty explosively, I think!–that people shouldn’t believe anything bank executives say in Congressional testimony, since they have a fiduciary responsibility to take stands that are good for their stockholders. (Did he really mean to say that the bank executives’ fiduciary responsibility required them to perjure themselves?) Since he’s a former bank executive, he is free to say what he actually believes, which is that the banks should be re-regulated, starting with capital requirements (not allowing banks to reach the levels of leverage they did before the current crisis); and he said he is in a strong financial consumer protection agency, because banks had been taking advantage of vulnerable and ignorant consumers for too long. (I guess it is easy enough to take these stances when you’re essentially retired.)

What turned me off about Poterba? Mostly his responses to one pretty pointed question about industrial policy and the “social costs” of the mass unemployment that has come with the rapid business disinvestment Reed discussed. Shouldn’t the federal government follow Europe’s lead in addressing these social costs via direct investment in industry, as Europe had in Airbus and in the auto industry? an audience member asked. Reed acknowledged that there were social costs to unemployment. But when Poterba addressed them, all he could come up with was that long-term unemployment degrades people’s job skills. He really seemed clueless about what’s bad–for people and communities, not “the economy,” or even simply for people’s long-term earning power–about mass, long-term unemployment.

And in response to the idea of direct government investment in industries, he said that this was a problem, because governments have a hard time picking winners, whereas “markets do a better job of allocating resources.”

So much for learning anything from the current economic crisis. Even Alan Greenspan seems to have learned more than James Poterba, for all he said last night.

The session ended before I was able to a
sk Alejandro’s question, but I think Poterba gave his answer. I did email him the question—I will let you know if I hear back from him.

—CS

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