Wednesday, May 06, 2009

My Manhattan Project - Blowing Up Wall Street

How I helped build the bomb that blew up Wall Street.

One of my (former) classmates at BGI turned me on to this article from The NewYorker. I found myself on the one hand questioning the writer's scruples and on the other hand thinking systemically about what Wall Street environment was like when he did his work. It's an interesting thing to think about; if the "system" is working in such a way as to support such activities, does that make it OK to go along with it? I don't think so. I mean, I'm part of the "mainstream"'s not like I'm tossing it all and moving to a farm (maybe I'll do that soon!), yet I am asking some pretty hard questions of myself and my lifestyle that I try to share (in a non-threatening way) with those around me.

Of course, we all collectively created the system in which we function...

A short excerpt from the end of the article:
Last month, my neighbor, a retired schoolteacher, offered to deliver my oysters into the city. He had lost half his savings, and his pension had been cut by 30 percent. The chain of events from my computer to this guy’s pension is lengthy and intricate. But it’s there, somewhere. Buried like a keel in the sand. If you dive deep enough, you’ll see it. To know that a dozen years of diligent work somehow soured, and instead of benefiting society unhinged it, is humbling. I was never a player, a big swinger. I was behind the scenes, inside the boxes. My hard work, in its time and place, merited a reward, but it also contributed to what has become a massive, ever-expanding failure. For that, I must make a mea culpa. Not a mea maxima culpa, mind you, but some measure of responsibility, a few basis points of shame. Give my ego a haircut.


Caleb said...

Alright Wayno, it feels weird to be sounding like a raving populist, but I've got to call you out on one thing:
"Of course, we all collectively created the system in which we function..."While it can be easily argued that we were (are) all participants in a system that was (is) sick and resulted in an economic neutron bomb stemming from that fellow's Manhattan Project, I think it is dangerous and inaccurate to spread the matter so broadly and evenly.
What about people who got laid off and have now lost their homes? They did indeed give money (mortgage payments) to some of the firms that are to blame, but these people were cogs in the machine, not the machine producer. Some (but not most) people with a 401(k) might have berated their investment professionals in order to draw greater returns quarter over quarter, but the vast majority were much less activist.
I will readily grant that, while most 401(k) holders were not actively responsible for pushing for untenable return rates, almost all of them have a degree of passive culpability: picking funds in a market that demanded managers to advertise high returns. This said, these people had little options from which to choose (another fund in the same poison pool?). It is also true that, if these people had gone out of their way to train themselves in the finer points of finance and economics they could (perhaps) have avoided some degree of catastrophe, but I think that it is not much more feasible to expect the average 401(k) customer to be able to analyze the macro implications for their participation, than it is for the average electricity consumer to understand the nuclear physics behind the nuclear energy that powers their (now foreclosed) home. Yes, it would be great if people were to engage every angle of their footprint in the world (and to understand the myriad ways in which these systems can go wrong), but in an interconnected global world such as ours, I simply don't think this is possible.

Beyond this, I don't think we can hold most people responsible (read: able to respond) for the system being (less-than-collectively) created in the way it was--most people might have tolerated, passively engaged, or remained ignorant to the system created on, for, and by Wall Street, but a laid-off middle manager in a Kansas widget shop had next to no ability to influence the system like a middle manager in a financial services firm in Manhattan.

This system was, perhaps, collectively supported, but certainly not collectively created, and therein lies an important distinction.

Anonymous said...

Thanks for weighing in. What I'm referring to in my comment that "...we all collectively created the system..." is the "We" of the United States population over the past 200 years or so. It is not as if the "system" magically appeared on the 7th day when someone was not paying attention, it's slowly developed through human behavior manifested in business & political actions over hundreds of years. One person may not be able to stop and change it tomorrow, but collectively, we do have a stake in what it looks like in the future.

If we're cogs, we can opt out (easier said than done, sometimes) or be a squeaky cog.

I'm not sure I buy the premise that 401K holders/investors do not have the capacity to analyze the macro effects of their investment actions. Mostly, we choose not to; we're often using the services of an investment advisor because we're not "smart enough". If investors have a moral conviction about what they invest in, maybe that's enough - directing capital toward "responsible" businesses (of course, that varied form person-to-person). Perhaps if we were not distracted by the everyday consumption of goods, services, and entertainment we would have the time to think about where we invest our money & our time.

Am I doing this? No. I'm starting to.

Maybe the damage isn't done.

Caleb said...

I think we're coming at this particular point from opposite ends.
I DO think that, in a vacuum, 401(k) holders have the capacity to "analyze the macro effects of their investment actions." The difference, as you keenly observe, is that, "perhaps if we were not distracted by the everyday consumption of goods, services, and entertainment we would have the time to think about where we invest our money & our time."
It is here where we differ, if only semantically. You said that "[p]erhaps if we were not distracted by the everyday consumption of goods, services, and entertainment we would have the time to think about where we invest our money & our time." To this I agree, but I think your point is a non-issue because the IF statement ("if we were not distracted")upon which it is premised is one that does not refer to the world in which we live. If we weren't distracted in this way, you would be absolutely right, but the fact of the matter is that we ARE, and so your IF has no bearing upon our reality.

Allow me to reiterate my nuclear physics-finance comparison: some (maybe even many) of us are capable of understanding the broader points of the nuclear physics that power our homes, but our world IS complex and it IS overloaded, and we DON'T have the capacity to understand ALL of the things that make our modern lives possible (nuclear energy, international finance, etc.), and so the average person has relatively little active responsibility when these complex things go awry.

Could the energy consumers of Three-Mile Island have possessed a modest understanding of nuclear physics that made the whole system work? Yes. Did the institution exist because those consumers made a market for it? Yes. Were they responsible for its failure? Not really, no.

I'm actually quite amiable to your case, but these are points that ought to be verbalized, I think.