Friday, June 24, 2011

Yves Smith on Ezra Klein's weird idea that if Michael Lewis couldn't see the meltdown coming, it's no wonder that nobody could


The trailer for Inside Job

"I hope that [shredding Ezra Klein's piece] will encourage readers to take a cold, bloodyminded look at the excuses made for malfeasance in our elites."
-- Yves Smith, in her "Naked Capitalism" blogpost
"Ezra Klein Should Stick to Being Wrong About Health Care"

by Ken

A lot of progressives once had warm feelings toward Ezra Klein, before his WaPo gig sapped the juices out of his brain, so that while he's not absolutely, totally, 100 percent useless (if only by comparison with so much of what passes for "analysis" in the infotainment noozemedia), he's now pretty much a full-time dunderhead, spending most of his time trying to gussy up conventional wisdom as rarified inside knowledge.

Now he's seen the film Inside Job, which takes a look at some of the cause-and-effect of the economic meltdown and points some accusing fingers at the financial sector, and our Ezra is here to tell us that he hasn't just seen it, he's seen through it: "What 'Inside Job' got wrong."
It was an excellent documentary for people who don’t want to understand the financial crisis but want to believe they would’ve seen it coming. Watching it, you’d think that the only people who missed the meltdown were corrupt fools, and the way to spot the next one is to have fewer corrupt fools. But that’s not true. Worse, it’s dangerously untrue. In telling the wrong story about how the financial crisis happened, it misinforms about how to keep it from happening again.

Even I, a notorious financial unsophisticate, cringed at most of what I saw in Ezra's piece as I skimmed it. His basic argument is that the economic meltdown, or the housing bubble -- he sort of seems to think they're the same thing -- was such a complex phenomenon that no one could have predicted it, and no one did, not even the people who did. Maybe they just kind of got lucky, or in any case, if they didn't predict the exact sequence of events, it doesn't count.

As proof Ezra offers the fact that all so many really smart financial-sector types missed it, not least someone as fantastically brilliant as the world's greatest financial genius, Michael Lewis, and they missed it even though they all had every incentive to recognize and act on it on account of how much they stood to lose, which proves that nobody could have seen it coming. And oh, by the way, it also proves that corruption couldn't have been a major factor in the meltdown.

I hope by this point you're seething. Trust me, that's nothing compared with what Yves Smith, of the "Naked Capitalism" blog, seems to have felt while she read the piece, and the result is a humdinger of a post: "Ezra Klein Should Stick to Being Wrong About Health Care," which she begins by crediting Ezra's post with "manag[ing] the impressive feat of being spectacularly off base, rhetorically dishonest, and embarrassingly revealing of the lack of a moral compass all at once."
Since being off base is a major part of Klein's brand, I suppose one should not be surprised; those who've had the good fortune to have limited contact with his output can read Jon Walker's "Ezra Klein: Insurance Exchanges Don't Work and Must be Expanded Dramatically," or Physicians for a National Health Care Program's “Does Ezra Klein really think 'managed care didn't kill anyone'?" for two of many examples.

I'm going to shred this piece in some detail, first, because it will be entertaining, and second, I hope that it will encourage readers to take a cold, bloodyminded look at the excuses made for malfeasance in our elites.

Referencing the chunk of Ezra's post I've quoted above, Yves gets into gear:
The only objection Klein raises to Inside Job is that it punctures the favorite defense of economists, regulators, and their mouthpieces in the media "whocoulddanode?" Klein rejects the notion that corruption played a role; there no effort to rebut the evidence proffered in Inside Job and numerous other accounts (including on this blog and in ECONNED). He simply sidesteps the issue of corruption via straw-manning: "corrupt fools".

The most corrupt were decidedly not fools, they knew better and still took the destructive, profitable course. . . .

I wouldn't attempt to preempt Yves's "shredding" of the post, but let me just hit some of her basic points:

* Michael Lewis? Gimme a break! (I'm paraphrasing.) "Can Klein simply not tell the difference between Lewis, a bond salesman 25 years ago, and author/journalist since then, and a genuine in-touch expert on some aspect or other of modern finance?" Yves registers astonishment that Ezra actually cites Lewis's edge-of-the abyss deriding of the financial prophets of doom, and the neat inversion by which he makes his hero's obtuseness prove his point -- hey, if the world's smartest person couldn't see it coming, then nobody could.

* In the embarrassing matter of the unheeded but hardly insignificant body of economic observers who did see that something terrible was coming, but don't count because they didn't spell out the exact sequence of terrible events, Yves offers the analogy of the impossibility, "identified in 1899 by mathematician Henri Poincaré . . . of determining the movements of three or more celestial objects (meaning their gravitational forces could affect each other," because so many complex factors interact, then argues that the financial system has "a lot more than three actors, and --
even if you can describe the forces at work accurately, you cannot make useful predictions, at least not over anything other than very short time frames.

But you could nevertheless very clearly see in late 2006 and 2007 that Things Were Going to End Badly merely by reading the Financial Times. You could tell we were in the midst of a global credit mania. . . .

* But the most astonishing piece of inanity in Ezra's post is his assumption that --
"[so] many people who got it wrong had an incentive to get it right. Journalists. Hedge funds. Independent investors. Academics. Regulators. Even traders, many of whom had most of their money tied up in their soon-to-be-worthless firms. "Inside Job" is perhaps strongest in detailing the conflicts of interest that various people had when it came to the financial sector, but the reason those ties were "conflicts" was that they also had substantial reasons -- fame, fortune, acclaim, job security, etc. -- to get it right.

Even I in my financial unsophistication was stopped in my tracks by this. Here's Yves's reaction:
Huh? He can write this with a straight face? He has the incentives 100% wrong.

Asset bubbles are very popular. They look like increased wealth to the community. That’s why regulators are reluctant to intervene. If they do, they make people look less prosperous immediately, and they can't prove the counterfactual, if they had left things alone, the damage would have been worse. Recall the orthodoxy then was you couldn't recognize a bubble in progress, better to clean up afterwords. And that's before you get to the corruption that Klein is so keen not to discuss: regulatory revolving doors, annual bonus cycles which promote the institutionalized "devil take the hindmost" attitude, known in finance as "IBG-YBG" for "I'll be gone, you'll be gone".

Yves has much, much more to say about how we got into such a mess, how it not only could be but was seen coming, and what might be done to make it less likely to happen again. Finally, she doesn't seem to think it's an accident that Ezra arrives at a view that hey, it was a terrible shame, the meltdown, but gosh, there's just not much we can do. After all, this is the view of the people whose approval now seems to matter to him.

She comes back finally "to the issue that Klein wants us to ignore: corruption and capture."
The problem is not that there are no solutions. There are steps that we could take now to make modern finance much less risky, but that involves imposing pain on bankers. And that has not happened because, as Simon Johnson pointed out in May 2009, the US has suffered a "quiet coup" and is now in the thrall of financial oligarchs. The obstacle isn’t scariness or complexity, it’s the lack of political will.

It’s easy to understand why Klein writes this sort of piece. What is hard to fathom is why anyone, other than his patrons, continues to give what he has to say much credence.

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At 5:54 AM, Blogger Stephen Kriz said...

I'm a little late in commenting on this, but I think Ezra Klein has been helpful to progressives in some ways. His work on health care has been very insightful. The financial crisis, which in my mind is on-going, was entirely predictable and people like Prof. Krugman called it two years before the bubble popped. Let's not be too quick to skewer Ezra Klein, since we have so few voices on the left that even have a forum to be heard at all!

At 12:47 PM, Blogger KenInNY said...

I take your point, Stephen, but can't agree. Yes, Ezra was "helpful" at certain point in the health care mess, but more often he spewed mountains of ignorance. There's a reason why Yves Smith titled her post "Ezra Klein Should Stick to Being Wrong About Health Care."

At this point, just because he's occasionally less egregious than some of the more hidebound purveyors of conventional wisdom -- and at those moments makes some sort of contribution -- that's no reason for failing to acknowledge that he isn't any sort of progressive, and the very perception that he is makes his loyalty to the power elite that much more dangerous.

Thanks for commenting.



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