Economists’ Ethics: Playing for Pay

“I don’t care who writes a nation’s laws — or crafts its advanced treatises — if I can write its economics textbooks,”

- Paul Samuelson, Economics: An Introductory Analysis, 1948

We have an excellent example of the low standard of ethics of a university economics department. Recall that Goldman Sachs salesman, Fabrice Touree, was convicted of fraud in the Abacus CDO scandal. In his emails, he callously joked about selling widows and orphans the financial junk that he helped to create ( See Demystifying High Finance .).

The economics department at the University of Chicago planned to have Fabrice Touree walk out of the criminal court, a convicted felon, and into its classroom as a teacher of an honors (what irony here) economics course. His potential students found no problem in such a role model.

But other students did. When The Chicago Maroon, the University of Chicago student newspaper, revealed it with scathing criticism, public outrage exploded and the university rescinded their offer.

Widespread Corruption in Academia

In a Democracy Now interview about his recent expose of the dark side of the economics profession in his book, Predator Nation, Charles Ferguson said a ‘predatory elite’ has “taken over significant portions of economic policy and of the political system, and also, unfortunately, major portions of the economics discipline.”

In making his probing documentary, Inside Job, Ferguson uncovered the extent that Wall Street has bought economists that influence government policies and the media. A clip from Ferguson’s interview of Columbia University economics professor, former Governor of The Federal Reserve Bank and best-selling banking textbook author, Frederick Mishkin, has become a YouTube classic.

First, a bit of background. In May 2006, when hedge fund managers were seeing the cracks in our economy, Mishkin, a governor of the Federal Reserve Bank, wrote a glowing report about the state of Iceland’s economy titled “Financial Stability in Iceland” — its economy was the first domino to fall in the 2008 Crisis. In the interview:

• Mishkin could not remember how much he had been paid for the paper (it was $124,000).
• When Ferguson asked what investigation work he had done, Mishkin replied he had “talked to people” and “trusted the central bank”.
• Mishkin admitted that he had not disclosed that the Icelandic Chamber of Commerce had paid him to do the report.

So, it was not an academic study by a Governor of the Federal Reserve Bank as it appeared; it was a marketing tool for a business organization. When Ferguson pointed out that Mishkin’s CV now describes the report as “Financial In-stability in Iceland,” Mishkin shrugged it off as a mere typo.

There is an eeriness about this video. Mishkin answers with an almost childlike innocence. As he stumbles, mumbles and fumbles, it seems he is just realizing that he might have done something wrong. The clip is an important study of a brilliant person who apparently doesn’t know right from wrong when earning money. In later interviews, he offers no justification for what he did, but rather blames Ferguson for sandbagging him.

Mishkin’s status within the academic community is untarnished. He remains highly respected by his colleagues and is on the editorial board of very influential economic journals. No action was taken by his professional body or university.

To show that Mishkin was not an anomaly, Ferguson continued with interviews of Mishkin’s boss at Columbia, and then, the head of the Harvard economics department, both of whom proved arrogant and defensive about protecting their own conflicts of interest from sources of big, big bucks.

The Benefits of Befriending Bankers

Other journalists had disclosed examples of Wall Street’s successful efforts to capture the top government economic advisers. One of the prime reports on how the Street rewards those who serve it well focused on Larry Summers.

Larry Summers has held about every important position an economist could dream of. To name a couple, he was Secretary of the Treasury and President of Harvard. He was a prime influencer on the Democrat government policies. Summers was a firm supporter of the hands-completely-off Wall Street policies that facilitated the crisis and was the turning point for the populist uprising that is dividing America so destructively today. If the Democrats want to see a prime reason for their drop in popularity, they need look no further than than their economist advisors.

• In 1999 Summers endorsed the Gramm-Leach-Bliley Act which removed the separation between investment and commercial banks, saying “With this bill, the American financial system takes a major step forward towards the 21st Century.”
• In 2005, when Raguram Rajan warned that the economy was in danger of collapse, Summers called him “ slightly Luddite “.
• Summers was influential in stopping Brooksley Born from investigating fraud in the derivative markets in 1996.
• He then oversaw passage of the Commodity Futures Modernization Act that prevented all regulation of derivatives.

In 2009, we got a look at this favored economist’s personal fortune. Summers became director of the National Economic Council in the Obama administration and had to disclose his wealth. On entering government service in 1999 under Clinton, his net worth was $500,000. When returning under Obama, Summers’ disclosure form stated his net worth to be $17m-$39m. His earnings in the one year prior to joining the governmentwere almost $8m;

• $5 million from the hedge fund D. E. Shaw, one of the largest hedge funds in the world-for part-time work mind you
• $2.7 million in speaking fees from Wall Street companies that had received government bailout money
• of that Goldman Sachs paid him $135,000 for one speech.

All a clear signal from Wall Street that it will richly reward its benefactors in government positions when they leave them.

Summers was not alone. In the two years between Janet Yellen leaving her position as head of the Federal Reserve and taking up Secretary of the Treasury, she collected $7.2 million in speakers fees.

Ferguson had this to say about the continuing serious corruption in academia:

“Over the past 30 years, significant portions of American academia have deteriorated into “pay to play” activities. These days, if you see a famous economics professor testify in Congress, or write an article, there is a good chance he or she is being paid by someone with a big stake in what’s being debated. Most of the time, these professors do not disclose these conflicts of interest, and most of the time their universities look the other way [Emphasis added] .

These are draft chapters for a proposed book: Arresting Power: Stopping Predatory Capitalism. In order to attract a publisher, I need to have about 10,000 followers on this site. So, if you find these posts helpful, please follow me to help me reach my goal.

Acknowledgement: Money image-Gerd Altman, pixabay

Originally published at https://jandweir.substack.com.