They were stupid because they continued buying into bubbles long after those bubbles were "obviously" sustainable? Please, then, explain whether either of the following categories of people are also stupid:

1) People who continued to buy into the housing bubble: buying a house, renovating it, and flipping it months later.

2) The makers of the dot-com bubble, namely the people who founded pets.com or the financiers who funded them.

If either of these categories of people were stupid, please explain why they're not also receiving endless opprobrium.

If neither of them is stupid, please explain what differentiates them from the makers of the current bubble.

Please convince me that you don't just have a gripe against financiers.

It strikes me that they deserve *some* criticism, but by no means all the criticism that's been heaped on them of late. There's blame enough to go around. Is Alan Greenspan stupid? Is Bob Rubin?

Finally, it seems counterproductive to blame individual actors for their stupidity here, when it's the rules of the game that make their stupidity dangerous. You want to stop other people from doing stupid things? Change the rules.

I love Lewis, since he's a fabulous writer and I dig reading his stuff. However, I always remind myself that he's the reportorial equivalent of that computer-learning program Rosetta Stone: he makes you think you get it, whether or not you did. I am a lot closer to this subject than most, and he paints a picture that is a lot more unequivocal than was reality -- not that shorting homebuilders or the GSEs or financials linked to subprime weren't great trades when I put them on in 2006. It's that even if you did see what was happening, you couldn't know when or how it would all unwind. Around the same time I went short refiners, too, which was a terrible trade, even though I was right on the merits (crack spreads are now negative - !). Timing matters.

Your conclusion here is half-right, perhaps as a result of reading Lewis and not digesting his fun little piece a bit more. Bankers en masse are not stupid, though they did a stupid thing here. Bankers have for years gorged themselves at the principal-agent trough. Historically, by the time you blow up a fund or even a bank, you're rich, and even then, you'll probably land another job. The mistake here is the same collective-action problem faced and failed in industry after industry. Collective action problems are never solved by agents. Collective action problems are solved by government.

From where I sit across the street from City Hall in downtown Manhattan, the problem is a revolving door of entitlement that has perpetuated the various bubbles and the greed. Not just on Wall St., but in the corporate law firms and banks. Just like at UC Santa Cruz (apparently), Northeastern Law School didn't send many kids into the corporate world. But for my peers at other law schools, there was something wrong with you if you weren't interviewing and getting those summer associateships.

Now, I don't want to be unfair to corporate law firms as a whole. Many of them have fine reputations for very important pro bono work and for contributing resources to social justice causes and volunteerism.

Still, there's a revolving door from Ivy League law schools and business schools to corporate law firms and Wall Street. And from those firms and corporations to the upper eschelons of power in government, the judiciary, or just plain wealth.

I don't see the problem so much as "stupidity," but more as Steve (above) says, it's a problem of the rules of the game. When you're on this path, one of two things happens: (1) You see dollar signs (a.k.a. "greed is good."); or (2) you hate your job, but it's taking you places, and so you "keep quiet" and go along with the herd. Either you feel entitled to the money or the eventual power the job will get you. And so, you lose your critical eye. You fail to question the system that put you where you are. Surrounded by successful elders who've gone before and your highly coveted degree, you think no harm will come to you.

Yes, I'm over-generalizing and I'm sure this isn't everyone's story, but from what I've witnessed, this is a prevalent pattern. I mean, look at the turnover at big law firms? How many people took the job for money and then split after two years versus how many actually LOVE corporate law?

The parallels between Nate Silver's analysis of the talk radio syndrome today and this financial sector echo chamber are striking. Big dangers for an uncritical general audience.

It's sort of interesting that Ezra followed this with his musings that culinary school might be too expensive; on the one hand, he's decrying the blank check handed to MBA holders, on the other he says don't go into debt for a professional degree. Others, it seems, would differ.

I agree, Ezra's analysis is simplistic, and I think it's one of those retrospective views where "that was so clear, why didn't we all see that" takes the place of actually remembering what happened. Lots of people said housing prices were unsustainable. Lots of people suspected the market was a bubble. But nobody, really, predicted what happened - even the bright guy at Goldman who counterinvested on Mortgage bonds. He just had a hunch. Timing was with him. Others had hunches. Some of them failed.

Are bankers the bad guys here? Yeah, but only when you broad brush define "bankers" as a variety of finanicial industry jobs; separately, no one job in finance can be solely responsible (even CEO or CFO). And beyond that, you fall into those ugly questions we're all avoiding - why'd you think $100,000 in credit card debt was okay? Who signed for mortgages worth double the price of your house? The role of consumers, of homeowners... in short, of all of us, can't just be dismissed. We were all there. We all watched it happen. We all pretended that things were fine, while knowing, on some level, they weren't. Does that make us a herd? Not exactly. It makes us human. It makes us flawed... let's just hope it doesn't make us destitute.

One quibble - it's not the job of most "Wall Street bankers" to allocate capital. It's to facilitate the allocation of capital by the market as a whole. Only bank prop desks and the risk managers who were supposed to oversee them were allocating capital.

"The possibility of making incredible amounts of money off of everyone else's folly should have been incentive enough to create more contrarian traders. But money isn't as powerful an incentive as you might wish. Social pressures are fierce. People are comfortable in the herd."

I don't mean to diminish the importance of herd mentality, but there is another reason. It requires an ongoing outlay to go short, whereas going long provides ongoing income, but requires capital upfront. Consequently most investors are very, very reluctant to have a simple short position for any period of time. Most shorts are offset by a long position elsewhere. For example, several funds tried to anticipate a subprime downturn by shorting the subordinated tranches of RMBS while going long AAA. So they ended up contributing to the boom by making AAA debt cheaper and they still lost money because their losses on the AAA paper outweighed their gains on the short position.

John Kenneth Galbraith was writing about this stuff in the sixties.

"Wealth, in even the most improbable cases, manages to convey the aspect of intelligence."

Can we say that this is why companies are willing to pay so much for good people? Even among those with top degrees, there just isn't that many who are capable of making good decisions. Supply is much, much less than demand.

Financiers have a special, unearned aura of brilliance about them that needs to be deflated a notch or three. Whether or not this or that financier is individually stupid, is irrelevant.

A well written article, portraying financiers in a stupid light, serves two valuable public purposes: encouraging the creators of the mess to STFU, and encouraging everyone else to stop listening to them.

Now I'm off to build some picture frames, so have a great day!

great article from greenfaucet. these guys have been ahead of the curve calling the recession. good read.

http://www.greenfaucet.com/economy/revenge-of-the-barbarous-relic/00273

Part of the problem with the Ivy league is that American secondary education has gotten so dumbed down that even doing extremely well at it doesn't mean you're particularly special. And considering the kind of work that's being done in those schools in terms of science, etc., it's unlikely that the kids who want to be bankers are the best of the bunch. I also wouldn't be surprised if the would-be bankers and lawyers are disproportionately legacy admissions, or come from backgrounds of privilege that boosted their high school preparation relative to poorer kids with similar native abilities.

And yeah, Alan Greenspan is stupid. He was a groupie of Ayn frickin' RAND. In anyone over age 17, that's pretty damn stupid.

Can we say that this is why companies are willing to pay so much for good people?
No, because that's not what's happening. Companies are willing to pay a lot for people with impressive-looking resumes. They have no demonstrated ability to distinguish good people from bad ones.
Even among those with top degrees, there just isn't that many who are capable of making good decisions. Supply is much, much less than demand.
True, but when the consumers are completely incapable of evaluating quality, you might as well sell shit and call it Shinola. (Whatever the hell Shinola is anyway.) This applies both to the complicated financial instruments themselves *and* to the financiers who dealt in them.

I think the latest Gladwell article was also quite relevant: http://www.newyorker.com/reporting/2008/11/10/081110fa_fact_gladwell

Aw, jeez, Gladwell? If Michael Lewis is Rosetta Stone, then Gladwell is the Internet Professor. Please.

If you read a New Yorker reporter here, make it Surowiecki.

"In theory, the market should correct for this . . ."

I believe this is exactly what we are seeing. How is what is happening NOT the market correcting? Don't call these people stupid, to the extent that our congress bails them out, they will have won, and they will do it again.

The market "worked", it just worked in a way that was not as neat or as pleasant as we would have liked. That is okay as far as the market is concerned. Its job is just to be, not to make us happy. Different people will react to this truth differently, but the market is definitely correcting with a vengence.