CHAPTER 12
Nothing like tear gas to change the subject, Milton Abrams thought after the attendees gathered again in the ballroom and after the Econometrics Society president completed the introduction he was supposed to make instead of reaching for the political hammer that Abrams now wanted to ram down his throat.
Thinking about Lasker’s criticism of China’s currency regime, Abrams wondered whether Lasker had shorted the market, knowing that forcing the Fed chairman to admit the helplessness of the U.S. in the face of Chinese economic expansion would drive down the exchanges by a couple of percentage points the following day. Abrams had seen others do it before and he considered it to be the niftiest, and scummiest, form of insider trading ever invented.
As he approached the podium, Abrams wondered whether anyone else in the room recalled that Lasker was the inventor of ETIFs, exchange traded index funds, that allowed investors to bet on the movement of the entire market at once instead of just one stock or mutual fund at a time, and recalled Lasker’s onetime slogan: Whoever moves the market, rules the world.
Abrams thanked the president for the introduction, made the obligatory how-many-economists-does-it-take- to-screw-in-a-light-bulb joke, and then moved into the substance of his speech.
“What I want to address today,” Abrams said, “is the fact that the economic models that have guided the central banks of both the U.S. and Europe and the risk assessment analyses of financial institutions throughout the world have failed. They have provided us with a picture of the economy that is simply mistaken. It has been…” Abrams felt like he was raising a sword to strike down and split the society in two, and then swung. “It has been nothing more than the imposition of mathematical fantasy over reality.”
The audience fragmented into groups of nodding and shaking heads, and then coalesced into what seemed to Abrams like bands of guerrilla fighters poised for battle in an academic jungle.
The Nobel Prize winners, who’d built their careers designing those models, had taken up defensive positions among their sycophants. Arms folded across their chests, heads fixed forward like obstinate children refusing to wash their hands before dinner.
Young professors of finance and physics and mathematics sat on the fringes, looking up at Abrams as though waiting for the order to fire.
“All of these laissez-faire models rest on the assumption that there’s an invisible hand that brings the market to equilibrium if left unfettered by government interference. It looks at economic history through the distorted lens of this model, and views the boom and bust cycles of the last hundred years merely as aberrations, when-in fact- they are the norm.”
Abrams thought of Hani Ibrahim, that puzzling little man whose office at MIT was the gravitational center of those rebellious youngsters, and of Michael Hennessy who’d driven him not only out of the country, but into hiding.
“What would the public think if it knew that the entire edifice-the… entire… edifice-of economic theory on which the hopes and dreams of two generations has been built rests on nothing-nothing-but on centuries-old analogies with the way particles of pollen drift around in space and with the way gas distributes itself in a container and with observations of water seeking its natural level.”
An image of a basement filled with putrid water flashed through Abrams’s mind and a wave of nausea wrenched his insides. Maybe Ibrahim was dead, had reached a final place of rest. Maybe Gage’s speculation was right: He’d not simply been deported, but sent somewhere to be tortured. And torture was no more of a science than economics. It was trial and error, and the extreme limit of that kind of error was death.
“Any plumber could’ve explained to the good men-and they’re all men-of economic science that water reaches its natural level in a man-made world only when the plumbing has failed.”
And maybe for all those years Hennessy had been searching for a ghost, a creature that persisted in existence only in his guilt.
“Let’s think back a few years, to the beginning of the mortgage crisis. Former chairman Greenspan testified before Congress and admitted-in his words-that 'there was a flaw in the model that defines how the world works’ and that ‘we obviously are viewing an economy that does not resemble our textbook models.’ “
Abrams raised both his eyebrows and his finger like a teacher who’d led students into an intellectual trap.
“Except the second comment was made in 1994, not in 2008-and in private, rather than in public, where it deserved to be heard. Which means that the Federal Reserve chairman knowingly encouraged the public in a delusion that he himself recognized as such.”
The youngsters in the audience sat up, puppylike, as if their owner was about to toss them a treat.
“And the country went more into debt and more into debt and the bubble grew and exploded and grew and exploded and wealth became more and more concentrated at the top and economic insecurity became concentrated at the bottom. And as sure as a syllogism, it has only gotten worse.”
The puppies began panting.
“It’s time to start with a new model. One that begins with the supposition that equilibrium is not the natural state of the market, and it’s not like water reaching its own level. A model that understands that the market’s natural tendency is to seek the extremes of expansion and contraction.” Abrams raised his finger again. “Once we begin from that assumption, the aim of the central banks ceases to be one of maintaining equilibrium by keeping the economy moving at peak speed-as if velocity alone will provide stability-but instead aims at reducing the vibrations and muting the effect of the gyrations-even if that means suppressing economic expansion.”
That had been the practical implication of Ibrahim’s theory, but Abrams wondered whether Ibrahim had a chance to think it through that far. Or whether he’d even had time to think out its implications for risk management.
“What is called risk management in financial circles is just quackery by another name. Investment banks and brokerage firms have wrapped themselves in a mythology that assures them that the tools they possess for managing risk actually do so. But they don’t. They fail because they plan only for small imbalances, temporary and minor losses of equilibrium, but not for the crises when they are most needed-and which they never see coming.”
Abrams focused on the reddening face of Mitchell Allen Levinson, a Nobel Prize winner for the Efficient Market Theory of Portfolio Allocation. He’d made a billion dollars, and then lost five, as head of ML Capital Partners. Abrams had watched him follow a self-hewn path from theoretical argument toward the cliff edge of practice, and then into a naked freefall through the pages of the New York Times and Business Week and Fortune.
Abrams smiled to himself as he recalled the last of the three-part Economist series that had reported that Levinson was now back to teaching Econ 101 at Michigan State, that his private jet was now owned by the CEO of Relative Growth Funds, and that the woman he’d divorced his wife to marry, and who’d once found his bald spot so endearing, had now decided that she only wanted to be friends.
“More fundamentally,” Abrams continued, “the theories by which we have managed both the economy and our investment practices are driven not by science, but by…”
Ivan Kahn, the mule-teethed 1970s radical, now the economy writer for The Nation, made a fist as if his favorite football team, six points behind with thirty seconds to play, had just made a first down at the one-yard line. Abrams imagined him finishing the sentence in his mind with the word “greed” or “corruption” or “selfishness,” the assumed sins of the wealthy.
“But by our having forgotten the real purpose of economic growth, which is to reduce the quantity of human suffering, not to increase the gross national product of gadgets.”
Kahn reddened, glanced around, and then slipped his BlackBerry into his shirt pocket.
Abrams felt a certain warmth envelop his body when he said that line and thought back to when he composed it while playing his self-appointed role as an adjunct professor of the New York transit system.
In the weeks after his confirmation by the Senate, Abrams had discovered that a temporary advantage of being a new Federal Reserve chairman was that those who vilify the position still lacked a recognizable face to target. That way it was still possible for him to do his research, not in his Liberty Street office at the New York branch of the Fed, but where it should be done, on the subway. He’d come to view trains not as mere modes of
