Economical with the Truth


The collusion between economists and financial institutions is creating concern: many academics invited to explain public issues in the media, and researchers appointed as government advisors, receive money from banks or big business. Can an expert be truly independent in advocating financial deregulation when he is also a director of an investment fund?

These potential conflicts of interest are not exactly secret, but those who benefit do not talk about them. Before the 2008 crisis everyone put up with the ambiguity: the media presented experts who were supposed to be neutral but gained both fame and cash from their frequent appearances. Since 2008, economists and their contacts have come under scrutiny. The American Economic Association (AEA) hopes that public attention will end intellectual prevarication: since January it requires all articles published in its scholarly journals to mention potential conflicts of interest. Authors must identify each interested party (1) from whom they have received significant financial support amounting to $10,000 or more in the past three years. This also applies to sums received by “any close relative or partner of the author”. The AEA, which will shortly celebrate its 130th anniversary, publishes some of the world’s most prestigious journals and does not act on a whim; people are taking notice.

After Charles Ferguson’s documentary on the financial crisis, Inside Job, people were angry. The compensation paid to some of President Barack Obama’s close advisers, who were involved in the liberalisation of the banking sector, raised questions: in the year to March 2009 Lawrence Summers, director of the National Economic Council, received $5.2m in remuneration from hedge fund firm DE Shaw and up to $135,000 a time for talks, most often to financial firms, plus generous payment for newspaper articles.

Economists were also discontented. During 2011, said George DeMartino of the University of Denver, a number of “scientific studies showed that conflicts of interest were the rule rather than the exception.” On 3 January 2011 academics Gerald Epstein and Jessica Carrick-Hagenbarth sent an open letter to the AEA, calling for action; it was signed by more than 300 economists, including George Akerlof, winner of the Bank of Sweden prize in economic sciences, and Christina Romer, a former advisor to Barack Obama. A year later, the AEA has taken action.

Meanwhile in France…

This change has yet to cross the Atlantic (2). In Le Monde on 1 February, the economist Olivier Pastré was angry at talk of France leaving the euro and set himself a mission: “To explain to the most vulnerable people in France, those most subject to disinformation, the risks of abandoning the euro” (3). He was described in the paper as a “professor of economics at the University of Paris VIII”. He is also chairman of IMBank (Tunisia), a member of the board of CMP-Banque, of the French Banking Directors Association and of the Europlace Institute of Finance. But when he speaks every Saturday morning on the France Culture radio showL’Economie en Questions, of which he is a co-producer, he is only described as a university professor.

“That’s a classic example of what led us to think there is an issue,” said Professor Michael Woodford, a member of the AEA’s executive committee. The AEA is not only concerned about its own publications: it also “urges its members and other economists to apply the above principles in other publications: scholarly journals, op-ed pieces, newspaper and magazine columns, radio and television commentaries”. Woodford feels readers have a right to know if experts are stating their own views, or are defending the interests of the institution they work for. Pastré’s article assured readers that if France left the euro its banks would see their short-term and long-term borrowing costs explode and would eventually lose profitability.

According to Patrick Artus, chief economist at the French bank Natixis, a director of Total and a member of the French Council of Economic Analysis, Woodford’s theory “makes sense in the US and the UK, but I do not really believe that it applies to the eurozone,” where “the number of economists with links to the financial industry is very low compared with the Anglo-Saxon countries” (4). They may be few in number, but they are very well represented in the media.

On 3 November 2011 France Inter’s morning show dealt with the G20 summit in Cannes. The guest commentator was Jean-Hervé Lorenzi, introduced as chairman of the Cercle des Economistes — whose role journalists usually fail to explain and whose members include Patrick Artus, Jean-Paul Betbèze (chief economist at Crédit Agricole), Laurence Boone (chief European economist at Merrill Lynch), Anton Brender (chief economist at Dexia Asset Management) and Olivier Pastré. A few days later, Le Téléphone Sonne, another France Inter show, reviewed the “lessons to be drawn” from the summit. The guest expert was Lorenzi, as “chairman of the Cercle des Economistes”. Under this title Lorenzi, who is also an advisor to the French Socialist Party’s presidential candidate François Hollande, has analysed the real estate market in the newspaper Les Echos, the stock market fall on radio station Europe 1, and “France’s fabulous destiny” on TV channel RTL (5). But Lorenzi is also a member of the boards of the business phone directory PagesJaunes, Associés en Finance, the French Association of Mobile (phone) Operators and BNP Paribas Assurance. He is auditor of credit insurance company Euler Hermes, a member of the supervisory boards of Compagnie Financière Saint-Honoré, opinion poll firm BVA and engineering firm Groupe Ginger, and advisor to the board of La Compagnie Financière Edmond de Rothschild Banque.

Christian Saint-Etienne describes himself as a professor at the French National Conservatory of Arts and Crafts when on France 24 and as an economist and political analyst when writing for Le Point, rather than as advisor to Conseil Stratégique Européen, a wealth management consultancy firm. Elie Cohen, also an advisor to Hollande, appears on France Inter or in Le Figaro as research director at the French National Centre for Scientific Research (CNRS) and the Paris Institute of Political Studies (Sciences-Po), rather than as a member of the boards of PagesJaunes and EDF Energies Nouvelles. Jacques Mistral describes himself as an economist when writing in Le Monde or appearing on France Culture, and as director of economic studies at the French Institute of International Relations (Ifri) on France 5’s C dans l’Air show, not as a director of BNP Paribas Assurance. Daniel Cohen, advisor to Martine Aubry, leader of the French Socialist Party, is discreet about being senior advisor to Lazard — the bank that is advising the Greek government on renegotiating its debt — but not about being professor of economics at the Ecole Normale Supérieure and the University of Paris I.

’The costs are the loss of integrity’

Through sitting on the board of major corporations (worth an average of $46,000/€ 35,000 for CAC 40 companies and half that amount for other listed companies, according to figures from the French Institute of Directors), private speaking engagements (for which Lorenzi charges $8,675/€ 6,600) and commissioned reports, French economists “have many opportunities to earn a lot of money,” said DeMartino, but “economists know better than anyone that there is no free lunch. If there are benefits, there are also costs. And, here, the costs are the loss of integrity.”

Lorenzi maintained: “The issue is whether the way you earn your living influences your judgment. It doesn’t” — 2 + 2 is 4 whether you write for a university or for a bank. But, Woodford pointed out, there are many areas where there is more scope for interpretation and “there’s no doubt there are people who have a direct interest in our economic arguments”. Deirdre McCloskey of the University of Illinois feels that economists too often act like lawyers, defending a case regardless of the evidence (6).

In Inside Job, Ferguson interviewed the economist Frederic Mishkin of Columbia Business School:

— In 2006 you co-authored a study of Iceland’s financial system [which stated] ‘Iceland is an advanced country with excellent institutions, low corruption, rule of law. The economy has already adjusted to financial liberalisation, while prudential regulation and supervision is generally quite strong.’

Mishkin: “And that was the mistake. [In 2008, the Icelandic economy collapsed.] It turns out that the prudential regulation and supervision was not strong in Iceland.”

— What led you to think that it was?

“I think that you go with the information you [have]. And, generally, the view was that Iceland had very good institutions and was a very advanced country.”

— Who told you that? What kind of research did you do?

“You talk to people, you have faith in the central bank, which actually did fall down on the job…”

— Why do you have faith in the central bank?

“You go with the information you have…”

— How much were you paid to write?

“I was paid… Uh… I think the number was… It’s public information.”

Mishkin was paid $124,000 by the Icelandic Chamber of Commerce to write the paper.]

— On your CV, the title of this report has been changed from ‘Financial Stability in Iceland’ to ‘Financial Instability in Iceland’.

“Oh… Well, I don’t know… Whatever it is… If there’s a typo, there’s a typo.”

’Economists are never held accountable’

The difference between a lawyer serving the best interests of his client and an economist who has made a mistake may seem tenuous. But, as DeMartino said: “Economists enjoy a privilege that other professions do not: they are never held accountable for their mistakes.”

Shortly after the start of the subprime crisis in the US, Elie Cohen predicted: “In a few weeks, the market will have re-formed and it will be business as usual” (lemonde.fr, 17 August 2007). Less than six months later, on Direct 8 TV, Alain Minc, investment banker and advisor to Sarkozy, talked of the “incredible resilience” of the system: “It seems to be regulated with such dexterity that we shall avoid a crisis that could have been as serious as the great financial crises of the past. It really is a very resilient world. … the global economy is quite well managed” (8 January 2008) (7).

Later that year, Lorenzi announced: “The central banks were quick and correct in their diagnosis and acted on it. In the midst of an interbank market crisis, they have shown great skill in averting a disaster: ultimately, they have made it possible for the US to avoid the failure of its mortgage lenders and allowed major banking firms that were in real danger to reintegrate some of their securitized assets without incurring liquidity risk” (8). These words had only just made it into print when Lehman Brothers collapsed. Artus, the editor of Natixis’s research journal Flash Economie (for which he averages five articles a day) trumpeted, in the 28 August 2008 issue of the French economic weekly Challenges: “The subprime crisis is behind us.” Later, he was angry at the idea that banks should pay more taxes and continue to finance economies made fragile by the crisis. He wrote in the 18 August 2012 issue of Flash Economie: “You can’t expect the banks to do everything.”

We may wonder if there is any relationship between such errors of judgment and the remuneration of their authors, or like Epstein, demand “norms of behaviour that colleagues, the press, students and citizens can help hold economists accountable to” (9). But bankers will defend the interests of bankers — Lorenzi says of his work: “I am what is known as a senior banker. I try … to develop business in the areas where La Compagnie Financière Edmond de Rothschild is active” (10). Did Pastré and Lorenzi have this mission in mind when they urged readers of their book Droite contre gauche? Les grands dossiers qui feront l’élection présidentielle (Right Versus Left? The Big Issues that Will Decide the Presidential Election; published 2012) to “abandon the illusion that the state will protect them”, to “boldly stake their bets on the market” and to avoid making “over-hasty judgments” about the banking sector?

De facto dictatorship

In November 2011 Jean-Pierre Jouyet, chairman of the French Financial Markets Authority (AMF) and former minister of state for European affairs in the Sarkozy government said of the markets: “Eventually, people will rebel against their de facto dictatorship” (11). But the markets already dominate the AMF, which is supposed to regulate them: the list of advisors to the AMF includes Artus, Olivier Davanne (co-director of Groupama Invest), Olivier Garnier (deputy general director of Société Générale), Ruben Lee (managing director of Oxford Finance Group) and Pastré.

In Inside Job, Ferguson also interviewed John Campbell, chairman of Harvard University’s economics department:

— A medical researcher writes an article saying ‘To treat this disease, you should prescribe this drug.’ Turns out doctor makes 80% of personal income from the manufacturer of said drug. Doesn’t that bother you?

Campbell: “I think… It’s certainly important to disclose the, um… The, um… Um… Well, I think that’s also a little different from the cases we’re talking about here, because, um… Um…”

Barbara Frugier, deputy executive director of communication for the AMF, responded to this analogy by saying: “Look, I’m not familiar with the pharmaceutical industry. In fact, I don’t see where you are going with this. I believe it’s normal practice to ask the experts.” But according to the AMF’s website the committee responsible for deciding the institution’s budget and drawing up its regulations is “subject to ethical rules and rules to prevent conflicts of interest”. On being promoted within the organisation in June 2011, the economist Christian de Boissieu, who is also chairman of the French Council of Economic Analysis, was invited to resign his posts as advisor to the hedge fund firm HDF Finance, on the strategy council of Ernst & Young, and on the audit committee of the bank Neuflize OBC, where he is still a member of the supervisory board. “I shall be resigning from the council very soon,” he said, “but in the meantime I exclude myself (I go out of the room and I don’t take any part in the discussion) when the AMF is discussing the bank, whether directly or indirectly.”

The AMF’s praiseworthy measures, and those of de Boissieu, implicitly criticise those who do not take similar steps, such as the media. Radio journalist Jean Leymarie of France Info interviewed Lorenzi on 16 December 2009, 24 November 2010 and 29 June 2011. Did he know of his guest’s role at Rothschild? “Yes, of course.” Why did he not mention it? “Our listeners are not fools. They know.” But how do they know if nobody on the radio ever mentions it?

A simple introduction

Jean-Marc Sylvestre was well aware of his guest’s other jobs when he invited Lorenzi to comment on the dangers of tighter regulation of the banking sector on cable TV channel LCI (24 April 2010); so was Yves Calvi when he asked Michel Godet and Christian Saint-Etienne to explain the inevitability of austerity measures on his C dans l’Air show (9 November 2011); as was the Financial Times when it asked Summers to contribute an article to its “Capitalism in Crisis” series (8 January 2012).

Introducing guest experts properly would not take that much space or airtime. “It would actually be so simple that I’m surprised they don’t do it already,” said Hubert Kempf, chairman of the French Economic Association (Afse). Did Afse plan to consult its members on conflicts of interest? “We may hold a round-table discussion at our next Congress” in July 2012. The French Association of Political Economy (Afep), established two years ago to promote heterodoxy in the profession, has “No [formal plans] yet, though there is already a consensus on the issue,” said Nicolas Postel, secretary of the association. “But in my view it would be a mistake to suppose that the problem is limited to the issue of conflicts of interest.”

The 14 February edition of Le Monde analysed the Greek crisis. The journalist, Claire Gatinois, quoted economists who all had direct links to the financial sector. But there were no conflicts of interest: Christopher Probyn was clearly described as “chief economist at State Street, a financial group based in Boston”, Natacha Valla as an “economist at Goldman Sachs” and Jésus Castillo as an “economist at Natixis”. “Experts at UBS” were also quoted. Gatinois obviously believes that bank economists are the best qualified to analyse this crisis. Postel disagreed: “Why should they be? What we need the media to do is not to provide a highly technical explanation of obscure financial mechanisms, but to ask fundamental questions regarding the status of the country’s debt — Is it legitimate? Where has it come from? Bank economists are not necessarily the best people to ask.”

Gatinois agreed that an economist from Goldman Sachs is hardly likely to say the Greek crisis is due to an illegitimate debt that should not be repaid, but said she “thought it would be interesting to talk to bank economists with relatively neoliberal positions, to show that they too are worried about the Greek situation”. Her intention was to present the neoliberal point of view. This approach is typical of the major media: interviewing trade union representatives (who are at least as well informed on the mechanisms and consequences of the social crisis) is less appealing. In October 2011 Gatinois talked to 40 economists and other experts. Of these, 29 worked directly for banks or other financial institutions and three were trade union members (12). Between 1 September 2008 and 31 December 2011,Le Monde quoted Artus in 147 articles, more often than Jacques Attali (132 articles) or Alain Minc (118 articles) and far more often than Jean Gadrey (only five articles on economic issues) or Frédéric Lordon (four). The ratios are similar to those observed in the dailies Libération and Le Figaro, and in most magazines.

Under these conditions, transparency may not be enough to counter the tendency of financial professionals to defend the interests of the financial sector.  

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