Friday, December 19, 2008

I think I agree...

Wow, Paul Krugman is usually so far out in left field that conservatives hate reading his stuff. He's been accused recently of being "intellectually dishonest" in several places.

But, as a Christian who teaches economics/finance, I find his column today spot-on. It's about how Bernard Madoff is a symptom:

How much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

After all, that’s why so many people trusted Mr. Madoff.

The column echoes Nicholas Nassim Taleb in a few ways. A lot of major banks and investors put their money with Madoff because he seemed to have a secret formula to beat the market. Really, he was just ripping them off. But, it's not any different than all the fund managers that get lauded for their success at beating the market when the success is due to randomness and their luck is about to run out, at which point they're canned and someone else becomes the shooting star.

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