Professor Harry Markowitz shared the 1990 Alfred Nobel Memorial Prize in Economic Sciences with two other financial economists. 

As The Royal Swedish Academy of Sciences noted in their Oct 1990 press release:

“The first pioneering contribution in the field of financial economics was made in the 1950s by Harry Markowitz who developed a theory for households’ and firms’ allocation of financial assets under uncertainty… This theory analyzes how wealth can be optimally invested in assets which differ in … their expected return and risk, and … how risks can be reduced.” [emphasis added]

Earlier this month, Financial Week published Mark Bruno’s interview with Professor Markowitz about today’s crisis.  I figured that Professor Markowitz’ views would have been very newsworthy, and that others would pick up the story.  Well, I was wrong. 

Below are the results of a search that I conducted on 16 Nov, which resulted in 4 [!] Google hits.  Two of the hits are on Financial Week’s own website.  The image is “hot”, so you can easily repeat the search with a single click - but please come back.

Four hits is virtually nothing. 

Below are excerpts [emphasis added] from Mark Bruno’s Financial Week interview.  As you read the excerpts, perhaps you will ask yourself the question that’s bothering me.  Specifically, did the general press overlook Bruno’s interview because Markowitz’ tough views challenge the popular notions of  “guilt” and “innocence” with respect to our current mess?

Bruno:
What would you consider to be the primary source, or the root cause, of the current economic crisis? …

Markowitz:
There has been, for a long period of time, considerable pressure by Congress on Fannie Mae to support the objective of low-cost housing. The only way to satisfy that was for Fannie to lower their standards. And once they lowered their standards, others had to do the same to be competitive…

If Congress keeps insisting that Fannie Mae keep supplying mortgages for low-income housing, we are in the same situation and this thing can last forever. Congress has to announce that if there is a conflict between sound banking standards and the objective of low-cost housing, sound banking standards have to come first. The people who couldn’t afford their housing, it turns out, we didn’t do them any favors. And in turn, we didn’t do the world any favors, either…

Bruno:
How … do you account for the role of complex, esoteric financial instruments?

Markowitz:
The complexity of financial instruments … played a tremendous role  …  People didn’t understand the risks they were assuming because there was no clarity into exactly what they were buying…

Something went wrong between financial engineers and … the banks [that consumed their products]. Financial engineers were inventing new products, and then selling them to places that should have had their own engineers to value them. In other words, if someone sells you an umbrella, don’t ask him if it’s going to rain or not.

What we … had …was first billed to be a liquidity crisis when Bear Stearns emerged as the tip of the iceberg.  But even after the Federal Reserve added liquidity … it did not solve the problem. Because this was never a liquidity crisis, it was a crisis of information.   No one knew who, exactly, held bad paper-and we can never allow that to happen again…

Bruno:
So what can we learn from this…?

Markowitz:
You’d hope that before people get new products, they really have to understand them first… You’d hope people would start to understand that they have to consider their portfolio as a whole … and all of the correlated risks involved… But people don’t learn.

Bruno:
Why is that?

Markowitz:
People go mad in crowds, but they come to their senses one at a time. And that’s the way it has always been.

Here is the link to Professor Markowitz’ complete Financial Week interview with Mark Bruno.

 
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I used to work with numbers for a living, but now I’m thinking about how uncertain things could get as I look for a job or at least my next ‘idea’.   Till next time.

REFERENCES

M. Bruno, Financial Week -  Calling Harry Markowitz, 3 Nov 2008.

 
Royal Swedish Academy of Sciences/Nobel Prize Foundation - 1990 Alfred Nobel Memorial Prize in Economic Sciences Press Release, 16 Oct 1990.

 
Linda Ronstadt, Linda Ronstadt Box Set - Poor Wandering One, Rhapsody/Elektra, 1999.