Posted by: Dirk | August 25, 2010

The Inside Job – Iceland edition

The FT’s Alphaville reports on Frederic Mishkin and a report he wrote about “Financial Stability in Iceland”:

One particular line from the report, and brought up in the interview, is this:

“The economy has already adjusted to financial liberalization, which was already completed a long time ago, while prudential regulation and supervision is generally quite strong.”

We learn later in the clip, that Mishkin was paid $124,000 to co-author the report — something which does not appear to have been disclosed in the document itself, though Mishkin does say in the interview that it was “public information.” What’s more, on the copy of Mishkin’s CV presented by the interviewer, the title of the report appears to have been changed to “Financial Instability in Iceland.” To which Mishkin’s response is largely incoherent, but includes something about a typo.

The interview clip, which is available via the link above, is taken from the upcoming movie “Inside Job”:

As the crisis rumbles along, more facts surface that suggest the idea of regulatory capture still has a lot to say. People who should act in the public interest instead use their position to profit individually by advocating policies that benefit a few wealthy individuals while the public bears the cost. Don’t get me wrong here: I don’t say that Mishkin misled the public, but he thought it would be OK to collect over $100,000 for a report that would support the position of those who paid him.

There is a huge ethical question mark that hovers above this situation, and this is the real story. How can you assume that economist’s are scientific when strong incentives exist that increase wealth and reputation for those that hold a particular opinion, like: “markets get it always right”? There will be self-selection in a Darwinian sense, until all people who don’t agree with the profession’s proposition de jour are driven out of the profession.

And the Icelandic people who fell victim to some of their own – after all, it was their compatriots who remodelled their society around a fragile banking system – are still wondering what was going on. They have ordered a working group to have a look at what happened. Here is their conclusion:

The Working group sees the primary problem reside in the fact that in the wake of a flawed process of privatization, where inexperienced owners gained large shares, the banks were allowed to grow far beyond the ability to supervise them properly. The policy to trust the bankers to largely regulate themselves proved fatal and the culture within financial institutions severely neglected professionalism and good working practices. The supervisory institutions did not put any real pressure on the banks to downsize and public administrators and politicians were as lamed in the face of a far too powerful banking system and failed to respect their primary obligations. The prevailing social discourse about the unique success of the Icelandic bankers also facilitated the events.

The main conclusion of the Working group are that although several individuals, in the financial, administrative, political and the public sphere, showed negligence and sometimes reprehensible action, the most important lessons to draw from these events are about weak social structures, political culture and public institutions. It is the common responsibility of the Icelandic nation to work towards strengthening them and constructing a well functioning democratic society.

UPDATE 20/06/2011: Naked Capitalism has created a Frederic Mishkin Iceland Prize for Intellectual Integrity.

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