Arnold Kling  

The Harvard-Goldman Filter

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Skidelsky, Russ Roberts, and R... College and Value...

My position on breaking up banks generates questions from two groups. Libertarians ask, how can I justify breaking up private sector institutions? Naive liberals ask, why is this policy not embraced by our political leaders?

My answer to both relates to what I call the Harvard-Goldman filter.

The Harvard-Goldman filter works like this.

1. To get into a position of power, you have to pass through a filter. The easiest way to show that you can pass through the filter is to go to Harvard and then work for Goldman.

2. If you do not go to Harvard and work for Goldman, then you have to show that you can get along with people who did.

3. The best way to show that you can get along with people who pass the Harvard-Goldman filter is to show that you believe in applying the Harvard-Goldman filter.

Why was Tim Geithner regarded as such an obvious, in fact necessary, choice to be Treasury Secretary? Because he satisfies the Harvard-Goldman filter, particularly point (3). He is not going to bring people from the wrong social caste into the policymaking arena.

So that answers the question from naive liberals.

As to libertarians, certainly in a world with no deposit insurance or government guarantees I could argue against government interference in the structure of private banks. But banks are not private in this country. They are quasi-public institutions (and if you read Niall Ferguson you might conclude that large banks have always been quasi-public institutions). There is a synergy between big banks and big government. Jefferson and Jackson were right. So breaking up big banks fits in with breaking up big government. Which is why we won't see the Progressive elite breaking up big banks.

The best book to read on the topic of the Harvard-Goldman filter is David Halberstam's Vietnam era opus, The Best and the Brightest. Goldman was not such a big deal then, but Harvard was, and so was Wall Street. What Halberstam shows is that investment bankers certified who was reliable or not--to serve in foreign policy positions.


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COMMENTS (14 to date)
wm13 writes:

In general, explaining one's failure to convince other people by reference to the psychological inadequacies, venality, or whatever of the other people is unpersuasive. If people disagree with you, the best course is to presume that they have good intentions and as much native brainpower as you do, and respond to their counterarguments.

It seems to me that commercial paper (not a financial innovation) issued by Lehman (not a large financial institution, and not one propped by the federal government) and owned by The Reserve Fund (again, not a large financial institution, and not in an industry that attracts lots of Harvard graduates) was a source of a lot more problems than Goldman Sachs or JP Morgan. So it is my own analysis, not my Yale degree, that leads me to disagree with Mr. Kling's policy prescriptions.

chipotle writes:

wm13,

Let me get this straight: Lehman Brothers was not a large financial institution? Their liquidation was the largest bankruptcy in American history.

fundamentalist writes:

Great article! I had noticed the Harvard-Goldman filter in action but couldn't put a name to it! Thanks!

Marcus writes:

Concerning the breaking up of banks...

Given the market's propensity to innovate its way around regulations, I'd like to see a post and/or discussion on how you think the market would respond to the knowledge of such a regulation?

Troy Camplin writes:

I believing in breaking up banks as a step to correct for the government interferences that created those monstrosities in the first place. Of course, it has to come with major (de)regulatory reforms to get rid of the regulations that create this problem.

I would also argue for an abolition of all health insurance except catastrophic in order to undo the damage the government did there was well. Then market forces will work to drop prices.

wm13 writes:

chipotle: $639 billion (Lehman's assets on the day it filed) would be about a third of Citi's or BofA's and smaller than Goldman or Morgan Stanley. On the day it filed, it was the smallest of the national investment banks. It's hard to imagine a true investment bank (i.e., an institution that underwrites large issues of securities on a firm commitment basis and makes markets in the securities it underwrites) being any smaller than Lehman was. So it is incumbent on Mr. Kling to stop sneering at Ivy League graduates and explain in a little more detail how the economy will operate without investment banks.

quadszillla writes:

I'm a libertarians and here's my take. If a bank is "too big to fail", meaning that it will be bailed out by the taxpayers before it's allowed to go under, then it should be reduced in size to where it's "big, but not so big that it can't fail."

Jason writes:

Maybe mandatory failure insurance would be a better solution.

There are economies of scale in banking that may justify large firms. Banks should just internalize their externalities.

Pete writes:

Yes, why change the rules? Lets just punish those who figured out how to win. Don't get rid of the problem, the Fed. Under such a scenario, the good banks, not the bad ones will be the first broken up.

Why not spend more time allocated to writing this nonsensical screed to educating people one the problems government causes, and why the government should be broken up and downsized?

DK writes:

wm13, your suggestion for how to argue with people certainly would put the plebs squarely in their place:

"If people disagree with you, the best course is to presume that they have good intentions and as much native brainpower as you do, and respond to their counterarguments."

Would you necessarily then presume that the premises of your arguing counterparty are true (as they have your brain power and good intentions). Ignore the fact that modern control structures (like the Fed) are based on generating layers of complexity, an alternative logical universe, on a questionable (at best) premises.

The Fed and Investment Banks are good. They are smart.

"explain in a little more detail how the economy will operate without investment banks"

The economy would have to replace a lot of useless jobs (banker, transactional lawyer, accountant, etc.). The former bankers could all be tasked with writing short stories, lawyers would edit the content, accountants would check for typographical errors and plot inconsistencies. The Government could continue to redistribute tax dollars to pay the short story writers, content revisers, and spot checkers to do these much less harmful tasks. Problem solved. Farms could still borrow money from traditional banks as needed. All the tasks of the investment bank would still occur just slower and without a bunch of third party intermediaries taking a cut for their "expertise." Did our society truly benefit from break-neck paced mergers/acquisitions and instantaneous unsustainable leverage on companies producing actual goods/services used by actual people? Perpetuating inflation would be left to the owners of the means of production to do on their own with the aid of traditional banks.

Jim Brown writes:

Kling's "Harvard filter" model doesn't appear to meet the test of falsifiability. I'd say condition no. 2 renders the argument basically tautological. Arnold certainly can do a better job.

david writes:

Then the real argument should be for the
abolishment of the FDIC and ultimately the Fed.
We had neither during the most productive time
in this country's history, namely the period of
"good deflation" during the 1880's. Yes, there
were bank runs, and yes, the market absorbed them
without disaster. Instuitons backed by
the threat of violence (government)that have absurdly centralized power will always be beholden
to whatever forces that are well connected enough
to gain positons within them, be it Harvard grads
or whomever. We have to tell the people and make them understand, for their own sake, that free market works.

[Comment edited: all upper case in final sentence turned to sentence case. Yelling is not acceptable on EconLog.--Econlib Ed.]

Gene writes:

I recall a sudden enlightenment when looking at several large tomes concerning zen and Buddha.

Lives of serious contemplation were dedicated to understanding and explaining that years of understanding and explaining were not important. Indeed, all that scholarship and analysis defeats the becoming of zen or nirvana.

As to the games and intermarriage of the financial and political elite, there is little one can do other than withdraw, use a sensible, local bank, turn down the free taste of the next drug, and vote everyone out of office.

Parties or philosophies are mostly an illusion. Pelosi and other haven't read the Constitution. (Last week were told: oh, we have lawyers for that.) There are only the Bloods and Crypts, so keep to your own affairs and vote everyone out.

Sure, idiots will be elected, then they will be gone.

Since there are no philosopher kings, today, or even mediocre drones in Washington, we won't lose anything by returning governance to the citizens, who may, then, return to paying attention. Worst case, the elite keep having to come up with new drones, but there will be no infestation by a few knuckleheads. Like I say, we should not get sucked into the illusions.

Every so often, someone sincere may be elected. That person, you may want to keep, but be careful.

Think of our leaders, so to speak, as pushers. They get you hooked and you sit around making up filters and other constructs as though that will help deal with the control of the elite.

All we have to do is detox, pull away, and continually vote "no." A third party may be nice, but you can't give anew party its own territory to sell drugs.

I think I am coming to understand the characters of the past who were "anarchists." Of course, they are dismissed by the system - what better recommendation could there be?

Does this mean you've softened your stance against the signaling model of education, or am I just reading too much into the "Harvard" part of the filter?

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