Posted by: CJ | March 26, 2009

Strange moments

There are some stories which are too strange and bizarre to not remember. Especially given their timing. Last year one of my close friends was a libertarian in the process of becoming more libertarian. I was heard a lot about it because he was reading Ayn Rand for the first time. I thought it was all ridiculous, but interesting. (And in general this friend was very interesting to talk to. Unfortunately he moved at the end of last year, so I don’t hear from him nearly as much.)

Over time I became frustrated with my roommate’s trust in markets. I’d heard him repeatedly tell friends, when in the midst of arguments over policy issues (it was an election year after all, and most of his friends were dyed-in-the-wool liberals), that corporations are much more efficient than government. And he railed against the welfare state. Frustratingly, when I asked him why he thought the welfare state was originally put into place if it was so horrible, he didn’t have a good response. He didn’t know enough history to talk about how it arose out of the New Deal and subsequent decades. Or about most of his libertarian beliefs, which were mostly based on theoretical ideas after all.

But one moment last year, more than any other, crystallized my sense of unease about both young libertarians and academics in finance. It was during the spring, when the financial crisis was just beginning. We were talking in my living room, and I mentioned that I was extremely confused about everything going on in the stock market. He thought he could explain things, since he was pretty sure he had a good handle on it. But then I started talking to him, figuring out where and what confused me. We quickly realized our sources were completely different. He’d been reading traditional media sources, with all the drawbacks that sort of reporting entails. I’d been reading academic economists, who reported as much or as little as needed on almost all aspects of the growing financial problems.

After about 10 minutes of talking about that day’s news, I asked my friend about a decision by the Fed about interest rates. But he didn’t know what the Fed was. An Ivy League physics major, who had just a few weeks before given a talk on the collapse of LTCM in 1998, and was convinced he wanted to go into finance and become a quant yet he didn’t know what the Fed was. That told me all I really need to know about how seriously to take his views on things. He, apparently, was not only overly confident in his knowledge but didn’t even have a good handle on how limited his knowledge was. It completely damaged his credibility in my mind.

While I know it’s unfair, that’s the image that comes to my mind any time I think about young libertarians or academic scientists in finance: someone incredibly intelligent and utterly clueless.

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