The Wall Street Journal Isn’t Even Credible on Economics

Welcome to new contributor Bob Fischer, a PhD who has been working on Wall Street and is now back in academia as a postdoc under Gavin Schmidt! Planet3.0′s use of this article is non-exclusive and Bob retains copyright. Bob promises to be a valuable ally for climate sanity. -mt

It should surprise no one that the WSJ has posted yet another climate change denial op-ed.  What is surprising is that anyone might actually believe them.  Why?  Of course science is not their thing. But more importantly, the WSJ, along with most of Wall Street, has done a poor job of accurately predicting ECONOMIC calamity in the past — something that SHOULD BE their thing.

Let’s review some recent history.  Where was the WSJ to warn us of the dot-com crash in March 2000, when the average stock was selling for a P/E ratio of 47.2?  Where was the WSJ to warn us of a long-term glut of housing in 2007, a year in which home construction vastly outpaced any rational increased demand for housing?  Where was the WSJ to do some investigative journalism on widespread mortgage fraud or inflated securities ratings, before it became painfully apparent to everyone in

2008 and beyond?  Where was the WSJ to warn us of the folly of buying opaque mortgage-backed securities, which later (predictably) turned toxic? Or the problems of unsustainable levels of personal debt?

America today is mad at Wall Street, and rightfully so.  The actions of “the Street” as a whole have left our nation today with high unemployment, deflated retirement savings and housing that we don’t need.  People who are supposed to be our financial experts and leaders have failed us.  The fact that many on Wall St. continued to collect princely sums for their services in 2008, 2009, 2010 and 2011 only adds insult to injury for the average American.

In the face of such massive failures in foresight, money managers typically excuse themselves.  “We couldn’t see the bubble,” “everyone else was doing it,” or “hindsight is 20/20.”  And then they move on to the “next big thing,” telling themselves This

Time is Different.  And the cycle repeats.

Why is Wall St. so bad at predicting upcoming calamity?  It’s not like NOBODY was aware of the dangers.  For example, Robert Shiller accurately predicted the recent housing bubble long before it burst.  Vanguard Funds avoided buying toxic assets because they investigated themselves, rather than relying on rating agencies.  These rational voices did not have to use rocket science to come to their conclusions.  Rather, they based their warnings of fundamental economic principles that anyone an understand:

namely supply and demand, and reversion to the mean.

But there’s an old saying that Wall St. is ruled by greed and fear.  And in 2007, Greed was King.  People had a hard time thinking rationally about the long term when they believed they could flip their asset for 50% profit in a few months’ time.  Meanwhile, a majority of Wall Street professionals were happy to oblige: because they make money on every trade, regardless of whether or not it’s profitable: brokers, investment bankers, real estate agents, mortgage companies, etc.  As long as these

professionals weren’t left holding the hot potato, they could profit today off of someone else’s future loss.  Opaque mortgage-backed securities provided a perfect vehicle for passing off the hot potato.

In my time on Wall Street, I wasn’t a broker.  Instead, I worked on the “buy side” (hedge funds).  I only got paid if we made money for our clients.  But there was still great pressure to chase short-term profit in exchange for future losses.  Why?  Because we got paid a yearly bonus based on that year’s profit.  If the hedge fund blows up next year, we would be out of a job, but we would still get to keep last year’s bonus. And unemployment is an easy problem to solve, especially if you’re an experienced Quant and you’re sitting on a pile of cash.  Many Quants I know have no financial problem going six months, a year or more between jobs.

And thus, the boom-and-bust cycle of the financial markets continues, and will continue, probably for as long as there is human civilization to make such markets.  We knew that nothing we did was sustainable — no investment strategy, arbitrage scheme or market making system.  Over time, ever-increasing competition and market efficiency always whittle away any

edge we had.  Thus, we lived on a mining mentality: get all you can get today, so you have the resources to mine the next pot of gold tomorrow — a pot that will probably require increased sophistication and infrastructure for smaller returns.  In this way, the petroleum and finance industries share a lot in common.

So what about climate change?  Climate science is warning us of dire consequences that could happen to the habitability of our planet over the next 100+ years.  Wall Street, with its millisecond view of the market and quarterly earning statements, has no concept or ability to think 100 years into the future.  Heck, we rarely even though 1 year into the future.

All the Street sees is the fact that there are billions to be made TODAY through continued exploitation of fossil fuels.  So what if our grandchildren get flooded out?  For Wall St, a climate crash would be not so different from a regularly scheduled market crash.  “We didn’t see it coming.”  “We thought this time is different.”  “We were just doing what we thought was right at the time.”

America and world beware.  This is the industry that, in pursuit of short-term profit, has again and again failed to predict calamity. Instead of showing financial leadership for the health of the nation, it has brought us toxic assets, acres of unnecessary houses, a foreclosure crisis and high unemployment.  Just to name a few.  America is rightly angry at this industry.  Its track record on disasters is so bad, it has absolutely no authority to speak about potential upcoming climate

disasters.  If we listen to the voice of Wall Street in the climate change policy debate, we should not be surprised at the likely outcome: short-term profits in exchange for long-term loss.

Let’s hope our grandchildren view us charitably.

Comments:

  1. Pingback: Market Crash, Climate Crash: Will the Wall Street Journal Warn Us? « Anti-Climate Change Extremism in Utah

  2. I'd like to discuss the question of limits to growth.

    This article strikes a very similar note to yours:

    And it's not like we haven't seen it coming. We've had 50 years of warnings from scientific analyses. And, if that weren't enough, we've had economic studies showing us that it would be better for us to not to wait—that it will ultimately be even more profitably for us to act sooner—but we're doing very, very little. Our eyes are still on the short term, whether it's food, water, or waste.

    This refers to a TED talk by Paul Gilding which argues that limits to growth are upon us. It's my belief that this is true. If so, then the WSJ's errors are all just instances of the same error: negl;ecting the long term simply because it lacks any tools for addressing the long term, because the long term fundamentally violates its assumptions.

  3. Thank you, Bob Fischer. I hope you'll have some time later to explain more deeply about the quants on Wall Street.


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