A Must-Read from the ‘Brittle Grip’ Series

April 7, 2014 9:46 a.m.

I’ve been whittling away at this “brittle grip” series for a while now. And I confess it’s the first contemporary or public issue that I’ve felt any urge to write about at length in many years. But since I’m not able to do that I’ve had to content myself with observation, anecdote and hypotheses. Social psychology, economics, extensive interviews and much more would be necessary to really grasp the issue in all its dimensions. That’s why I was so charged to receive this reader email on the brittle grip theme from TPM Reader ML. It’s really, really worth your time to read.

I am an MBA and, after working in the “private sector” for a good while am back in the public policy world. I am also a fellow Brown grad (and long time reader – since early 2000s).

Anyway, I was, at one point, a real free market believer. I did some Jeff Sachs goes to Bolivia type of stuff. It was a heady time – the 90s. The market could bring prosperity to peasants in Bolivia (if only they let us privatize retirement and force them to become investors somehow). The market was good for you and everyone.

The key to all of this? Basically, the “science” behind the market. The efficient market theory. Black Scholes! Portfolio theory! Betas! If you had the tools, you too could make money. Prices were set by the “market” and data not men. My finance profs at my business school seemed like scientists (not thereoticians).

Anyway, in 2008 what happened is that the efficient market theory went to shit. Krugman, Justin Fox and others have written about this extensively and persuasively. Ironically, the mainstream and business media have ignored this pretty important finding from 2008. That the numbers show that markets were not that efficient. That you can’t balance portfolios. That Wall Street doesn’t know how to price risk.

The crash turned efficient markets theory into ideology rather than science. Fox, Krugman and other talk alot about this. The guys at Chicago – super smart, data driven people – are now ignoring data because it leads to conclusions that they don’t like – that markets can be irrational.

The same thing is happening with Wall Street. Being a Free Market person is now more about belief than data.

I see the consequences in the non profit world where I now work. We have funders who – before 2008- were open to market based and policy solutions to social change. After 2008, it changed. Suddenly, the ONLY solution was the free market (ironic given that 2008 proved that the free market is far from a perfect solution for many things). If you were for policy change – suddenly you were a socialist.

All of this has put the people who defined themselves by the free market under seige. Free market, finance guys don’t have to read Ayn Rand to feel this way. They just have to rely on the idea that the free market for their business and intellectual assurance that making money is good. This includes a lot of people in finance, venture capital, business.

I do have some sympathy for these guys. I believed in this stuff too. It would be nice if it were true and that free markets could bring freedom and prosperity to all of us. The fact that the data – DATA! – is against them in this regard makes everyone tetchy.

For me, what happened (for context) is that after my Sach like work (also in South America) I saw the consequences of privatizing the airlines and bank – it was to make a few guys like Carlos Slim really rich (and not help many others). It turned me from a true believer into an apostate. I always thought that what happened in Mexico and South America in the 90s and early 2000s could be an object lesson for us in the US and, lo and behold, I may have been onto something.

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