The Past Speaks

“Bailout Risk, Far Beyond the Banks”

That’s title of an article by Gretchen Morgenson in the New York Times. She reports that global financial regulators are moving towards the creation of a list of “too big to fail” non-bank financial companies. Many taxpayers around the world will be alarmed by this news, given our recent experience with “too big to fail” banks. Such banks are bailed out by governments whenever their investments go sour because governments are reluctant to allow a mega-bank to go down. Everyone knows that the mega-banks can’t fail and that makes the equity of firms such as JPMorganChase especially attractive to investors. Such banks enjoy an implicit subsidy and find it easier to raise capital, so they will just grow larger and thus “too big to fail” becomes even more of a problem. Moreover, their managers’ knowledge that they are protected by the state changes their calculus about risky investments. It’s a classic case of moral hazard.

According to the NYT,

Last week, global financial regulators moved a step closer to extending the TBTF principle to non-bank financial institutions. A paper published by the Financial Stability Board and the International Organization of Securities Commissioners laid out how regulators planned to identify financial entities that are not banks or insurance companies but nonetheless are systemically significant and whose failure could pose a threat.

Among the paper’s main suggestions: Investment funds with more than $100 billion in assets should be designated as systemically important and subject to closer oversight. Many of these funds currently fall outside of a strict regulatory regime or are subject to only a light touch by financial overseers. Many — think hedge funds — are also shrouded in secrecy.

None of this is earth-shattering news. But no investment executive wants his company to land on a list of systemically important financial institutions. The increased scrutiny that this would bring is unwelcome to many in the powerful asset management industry.

I’m not convinced that “no investment executive” would want the implicit subsidy conveyed by being on this list of systemically important financial institutions. In fact, I think that the opposite is true.

In the last few weeks, there has been a lot of discussion online about whether the academic labour market in the United States resembles the drug gangs discussed in Freaknomics. As a follow up to this discussion, I would like to share a great post by Bloomberg’s Megan McArdle on the state of grad school in the United States. She applies standard economic concepts to understanding the plight of sessional lecturers and the reasons for the recent glut in PhDs. She correctly points out that the professoriate is similar to the world of journalism in the career path is something like a tournament. 

The first is that I myself work in a profession that looks a lot like a tournament: a lucky few at the top, and a lot of hopefuls who don’t make it. That’s absolutely true. But I don’t encourage young people to seek jobs in the profession; I tell them the math is terrible and getting worse, and they should do something else. The economics of the industry are very bad, unless you are lucky enough to work for a place like Bloomberg News, which doesn’t depend on advertising. I certainly don’t get paid to train them for journalism jobs that they probably won’t get.

That said, most people don’t spend five or six or eight years just preparing to be eligible to get a job in journalism, and an additional four years or so cycling through post-docs before it becomes clear that that journalism job isn’t going to happen.Nor, when they are six years into their first permanent job, do they have a committee that meets to decide whether to fire them and put them back on the job market, quite possibly with very poor prospects. They don’t have to move to towns in the middle of nowhere or give up relationships because their partners will never be able to find work in the Ozarks. Female journalists do not have to put off starting a family until they’re pushing 40 because it would be insane to reproduce before the tenure committee approves them. The opportunity costs of trying to become a journalist are quite a bit lower than the opportunity costs of trying to become an academic.

She proposes a number of specific reforms to the US PhD program. At one point, she asks for these programs to become more like British ones: shorter and higher initial barriers to entry. 

But I can think of a way to keep fewer young people from burning a decade trying to get one of these jobs, which is to push the competition back to the graduate school application phase, rather than making them compete for a shrinking number of tenure-track jobs.  [AS: That’s exactly what they do in the UK]. Medical training is also a grueling process that takes the better part of a decade to complete (and it’s ruinously expensive, to boot!). But at the end, almost all of them have decent-paying jobs.

Obviously, that means cutting off some people who really would have blossomed in graduate school. But it also means rescuing lost decades for a lot of others. Alternatively, shorten the grad school process and stop requiring massive dissertations that take years to conceive and execute. [AS: Getting a PhD in the UK is relatively quick, as there one isn’t required to do coursework or comps before starting work on the thesis]. Set deadlines. Institute hard exit points every few years, the way consulting and investment banking do. But for heaven’s sake, do something so that people don’t find themselves at the age of 35 having to start over when their peers have spent more than a decade building families and careers.

McArdle concludes by comparing the ethical standard of grad school admissions committees to the casinos that predate on gambling addicts. Personally, I think that this comparison is a bit harsh, but then I’m looking at the world through the perspective of someone who succeeded in the tournament and landed a tenure-track job. 

AS: This new BackStory podcast should be of interest to historians of capitalism.

“Pullman, Illinois, was meant to be the perfect capitalist utopia. Built by railroad magnate George Pullman to house his workers, it was touted as a secure, healthy environment that would ensure worker’s happiness, and avoid labor strife. But it didn’t quite work out that way…
Listen to our interview with historical archaeologist Jane Baxter, who tells the story of Pullman’s failed experiment:http://bit.ly/1a21zA8. And hear more in our special web extra exploring the archaeology of the town itself: http://bit.ly/1egKRPZ.

Image: Pullman Prior to the Strike of 1894, courtesy Northern Illinois University.

AS: The BHC’s Exchange blog has posted a list of new books in business history. I’m re-posting it below.

Marcelo Bucheli and R. Daniel Wadhwani, eds., Organizations in Time: History, Theory, Methods (Oxford University Press, January 2014)

Adam Clulow, The Company and the Shogun: The Dutch Encounter with Tokugawa Japan (Columbia University Press, December 2013)

Katherine C. Epstein, Torpedo: Inventing the Military-Industrial Complex in the United States and Great Britain (Harvard University Press, January 2014)

Walter A. Friedman, Fortune Tellers: The Story of America’s First Economic Forecasters (Princeton University Press, December 2013)

Margaret C. Jacob, The First Knowledge Economy: Human Capital and the European Economy, 1750-1850(Cambridge University Press, January 2014)
David Koistinen, Confronting Decline: The Political Economy of Deindustrialization in Twentieth-Century New England (University Press of Florida, December 2013)

Robert MacDougall, The People’s Network: The Political Economy of the Telephone in the Gilded Age (University of Pennsylvania Press, December 2013)

Quincy T. Mills, Cutting along the Color Line: Black Barbers and Barber Shops in America (University of Pennsylvania Press, October 2013)

Robert W. Patch, Indians and the Political Economy of Colonial Central America, 1670-1810 (University of Oklahoma Press, October 2013)

Edward J. Roach, The Wright Company: From Invention to Industry (Ohio University Press, January 2014)

Richard Roberts, Saving the City: The Great Financial Crisis of 1914 (Oxford University Press, January 2014)

Jeroen Salman, Pedlars and the Popular Press: Itinerant Distribution Networks in England and the Netherlands, 1600-1850 (Brill, October 2013)

James A. Schafer, Jr., The Business of Private Medical Practice: Doctors, Specialization, and Urban Change in Philadelphia, 1900-1940 (Rutgers University Press, December 2013)

Jonathan Silberstein-Loeb, The International Distribution of News: The Associated Press, Press Association, and Reuters, 1848-1947 (Cambridge University Press, February 2014)

Kendra Smith-Howard, Pure and Modern Milk: An Environmental History since 1910 (Oxford University Press, November 2013)

Philip J. Stern and Carl Wennerlind, eds., Mercantilism Reimagined: Political Economy in Early Modern Britain and Its Empire (Oxford University Press, November 2013)

Pamela E. Swett, Selling under the Swastika: Advertising and Commercial Culture in Nazi Germany (Stanford University Press, December 2013)

Gabriel Tortella and José Luis García Ruiz, Spanish Money and Banking: A History (Palgrave Macmillan, October 2013)

Jenifer Van Vleck, Empire of the Air: Aviation and the American Ascendancy (Harvard University Press, November 2013)

Benjamin C. Waterhouse, Lobbying America: The Politics of Business from Nixon to NAFTA (Princeton University Press, November 2013)
John F. Wilson, Anthony Webster, and Rachael Vorberg-Rugh, Building Co-operation: A Business History of The Co-operative Group, 1863-2013 (Oxford University Press, December, 2013)

Robert E. Wright, Corporation Nation(University of Pennsylvania Press

Historian Margaret MacMillan has published an essay on the lessons of the First World War for the present on the Brookings Institution website.

The essay, which is a teaser for her new book on the origins of the First World War, deals with the relationship between globalization and the roots of the conflict.

You can watch Professor MacMillan talk about her book below:

Was the First World War a just war fought against an evil enemy or was Britain’s decision to get involved in this conflict an appallingly stupid move that doomed millions of young men to death?  This question has been debated extensively in the last 72 hours, ever since the British Education Secretary for England, Michael Gove, declared that he thought that schools should use the upcoming centenary of the war to teach young people that the conflict had been a just war fought against a nation intent on world domination. Gove clearly has no time for the view that Britain and Germany were, in 1914, morally equivalent.  Gove denounced the 1980s TV comedy Blackadder for disseminating left-wing propaganda. He also attacked Sir Richard Evans, a distinguished academic historian of the Third Reich, for having questioned whether British soldiers in the First World War had indeed been fighting for freedom and justice.  In Gove’s view, such comments undermine patriotism and respect for the armed forces.

Gove appears to be departing from the UK government’s official view that the commemorations should not seek to attribute blame to either the Central Powers or the Entente. Since the 1980s, when Francois Mitterand and Helmut Kohl attended a joint commemoration ceremony at a First World War cemetery,  it has been standard practice for national leaders in the EU to honour and remember the dead who fell on both sides in the First World War.

Needless to say, Gove’s remarks, which were reported in the right-wing Daily Mail. Gove earned a smack down from Dr Tristam Hunt, the Labour MP who is the shadow Education Secretary and who happens to be a distinguished academic historian with a PhD. I really liked the opening paragraph of Hunt’s essay on Gove’s views:

Two days after Michael Morpurgo, author of War Horse, published a beautiful essay calling for this year’s First World War commemorations to “honour those who died” and “celebrate the peace we now share”,Michael Gove has delivered the government’s response. In an essay for the Daily Mail, the education secretary announced that the 1914 centenary should be about “battling leftwing myths that belittle Britain” and denouncing historians who “denigrate patriotism”. It is shocking stuff.

Hunt suggests that Gove’s comments may have more to do with the 2014 European parliament elections and the need to appeal to the anti-EU faction within the Conservative Party than a reasoned and evidenced view of history.

In retrospect, it was rather foolish for Gove, who has zero academic qualifications in history, to bring a knife to a gun fight with Hunt.

In this audio clip, you can hear history professors Sir Richard Evans and Gary Sheffield debates Gove’s ideas.

For other responses to Gove’s comments, see here, here, and here.