Sunday, August 16, 2009


"Most US economists believe globalization is good. The unfettered flow of goods, labor, and intellectual capital across our international borders reduces costs and improves competitiveness of most sectors of the economy. ... Foreign students increasingly dominate US doctoral programs in economics. Although the number of doctorates has remained relatively stable over the past 35 years, the fraction of these degrees conferred on foreign students has increased dramatically--from 20.5 percent in 1972 to 72 percent in 2005. ... The best and the brightest? Perhaps. Most PhD candidates in economics are Asians--from Japan, Korea, India, and China, and Taiwan. ... But there is one problem: while the Asians are whizzes at math, they generally do not speak English well. Had they been high-schoolers, remedial English classes would have been mandatory for most of them. ... Gone was the history of economic thought. Gone was the economic history course that exposed students to market failures and the importance of psychological factors--what Keynes dubbed 'animal spirits'-- to a prosperous economy. In their place: mathematically-oriented courses devoid of any historical content or context. ... In the mid 1980s the financial community discovered it could use mathematics to make money. ... A boom time for economics PhDs? You betcha. What Wall Street was really after, a former 'rocket scientist' says was not PhDs, but PSDs: people who were 'poor, smart and with a deep desire to get rich'. Asian PhDs fit that description perfectly. Born Xiang Lin in China, educated in Canada, Mr. Li was a sucessful PhD actuary before he published the mathematical equation that propelled him to the position global head of derivatives at Citigroup. His equation 'proved' that the risk of an investment grade mortgage defaulting could be estimated with precision, independently of the risk that other--say, sub-prime mortgages--would default. ... Ergo, no need for AIG and other insurers of mortgage-backed debt to spread their assets among different instruments if you know the risk of each asset class with precision", my emphasis, Edwin Rubenstein, 27 July 2009, link:

Most Asian PhDs I've encountered are mathematically knowledgable economic ignoramuses. They fall prey to economic fallacies an average CPA with three years experience won't. Proved? Hahahahaha. Know the risk of an asset class? Eugene Fama, where are you? I've said before, Citigroup is one of the US most mismanaged entities. It even has Vikram Pandit, Indian PhD as CEO! I have a current dispute with one of these geniuses. I'll describe it. One of my clients issued two-year converts with a 10% coupon, convertible at 47% of the common stock's price at issuance! That's right. Suppose the client issued $1,000,000 of converts when the stock was $1 a share; at $0.47, the debt converts into 2,127,660 common shares. The converts conversion price was not at a market premium, say $1.25, yielding 800,000 shares, but a discount. The PhD consultant has mathematical models jump through hoops to show the convert's "implicit" interest rate is not the 85%+, I think it is. He is flustered. Why? I must be the first person he's met who told him, "I don't care if you have a PhD. I don't care if you are Milton Friedman returned from the dead. The client made a bad deal. Your calculations are worthless". He can't comprehend that no matter what his models "cash flows" are, the client issued shares at a 53% discount to the market, a "real" cost.


Anonymous said...

100 years after the banker JP Morgan slowed or averted the panic of 1907 with no fancy PhD's finance is dominated y these grunt quants.

Look at the research published by the Fed... most of it is quant nonsense and hyterical to imagine the Fed Board and staff debating some of those theories..i.e.

'Recent U.S. Macroeconomic Stability: Good Policies, Good Practices, or Good Luck?'' (with Shaghil Ahmed and Andrew Levin), The Review of Economics and Statistics, vol. 86 (August 2004), pp. 824-832.

In the end the only thing that counts is the printing press there. The rest is voodoo... PhD voodoo.

Independent Accountant said...


Jr Deputy Accountant said...

First of all, +1 to you, Anonymous. I have ONE Fed read that is interesting and - not surprisingly - it is one of their lawyers, not one of their research economists.

I have to drink to be able to read some of it.


the last part of this is the absolute best. you nailed it.