Monday, April 20, 2009

Choice bits

Management professor Henry Mintzberg gives no quarter as he assesses blame for the economic crisis we face. Harvard gets a couple of well deserved kicks in its backside:

Harvard prides itself on how many of its graduates make it to the executive suites. Learning how to present arguments in a classroom certainly helps. But how do these people perform once they get to those suites? Harvard does not ask. So we took a look.

Joseph Lampel and I found a list of Harvard Business School superstars, published in a 1990 book by a long-term insider. We tracked the performance of the 19 corporate chief executives on that list, many of them famous, across more than a decade. Ten were outright failures (the company went bankrupt, the CEO was fired, a major merger backfired etc.); another four had questionable records at best. Five out of the 19 seemed to do fine. These figures, limited as they were, sounded pretty damning. (When we published our results, there was nary a peep. No one really cared.)

How much discussion has there been at Harvard about the role it might have played in forming the management styles of graduates who, over the past eight years, have been running America and what used to be its largest company

See also here and here.

Paul Krugman shows why Larry Summers is the gift that keeps on giving:

Only a few people warned that this supercharged financial system might come to a bad end. Perhaps the most notable Cassandra was Raghuram Rajan of the University of Chicago, a former chief economist at the International Monetary Fund, who argued at a 2005 conference that the rapid growth of finance had increased the risk of a “catastrophic meltdown.” But other participants in the conference, including Lawrence Summers, now the head of the National Economic Council, ridiculed Mr. Rajan’s concerns.

And the meltdown came
James Surowiecki notes that companies always face two kinds of risk.

Then again, the record is also full of forgotten companies that gambled and failed. The academics Peter Dickson and Joseph Giglierano have argued that companies have to worry about two kinds of failure: “sinking the boat” (wrecking the company by making a bad bet) or “missing the boat” (letting a great opportunity pass).

In a perfect world, competition will balance those risks. Those who gamble and succeed will grow. At other times, the prudent will inherit the market when their high flying brethern crash and burn.

In our less than perfect world, we have created a bias in favor of gambling.

First, it is increasingly hard for conservative firms to sit out a speculative binge. The stock market drives down their share price compared to their aggressive competitors. The CEO gets fired or the company is acquired by a gambling firm. The end result is that there are no grown-up companies around to sort through the debris after the gamblers wreck their companies.

The second bias is discussed here:

The Looting of America’s Coffers

Sixteen years ago, two economists published a research paper with a delightfully simple title: “Looting.”

The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

On Tuesday morning in Washington, Ben Bernanke, the Federal Reserve chairman, gave a speech that read like a sad coda to the “Looting” paper. Because the government is unwilling to let big, interconnected financial firms fail — and because people at those firms knew it — they engaged in what Mr. Bernanke called “excessive risk-taking

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