Heres an article I just read: “I recently had dinner with some of my students who will be graduating in the coming weeks. To make conversation, I asked what they will all be doing next year. An uncomfortable silence settled over the table. No one ever did answer the question. I suspect there are many such conversations going on around the country, as students pick up diplomas, take stock of their student debt, and wonder what the heck comes next. This isn’t just a bad job market - it’s the popping of a “human capital bubble.” Wall Street and its assorted reckless offshoots didn’t just squander much of our capital; the financial industry also sucked up human talent for the better part of a decade that should have gone somewhere else. It’s the human equivalent of those empty subdivisions in foreclosure that never should have been built. That’s what happens with bubbles. Resources – including people – are allocated poorly because the market sends faulty signals. Too Many Investment Bankers Several years ago I looked at the list of jobs for the graduating seniors in my old fraternity. These are really bright kids at an Ivy League school. At least half were going to consulting and investment banks. I remember thinking: “That’s too many,” which is an odd thought for someone who believes in labor markets. But I had a similar thought around the same time when I saw new golf courses and developments springing up like weeds across southwestern Florida. The units were priced at $700,000 or $800,000, even though the land had no inherent scarcity value. The developments weren’t on the ocean, or even near the ocean in some cases, meaning that there was nearly unlimited space to build more and more identical developments across Southwest Florida. “Those prices don’t make sense,” I remember thinking. The land doesn’t have much value, and the construction costs for stucco condominiums around a golf course are only a fraction of what’s being charged. Believe me, I didn’t predict the crash; I’d be a much richer man if I had. If anything, I talked myself out of believing that there were problems afoot because I’m such a firm believer that the most beautiful thing about markets is their ability to allocate resources efficiently. After all, the whole point of a market, whether it is real estate or labor, is that prices send meaningful signals. Graduates take jobs with high salaries because that is where their skills will be most productive. Developers build new units where prices are high because that is where there is the most demand relative to supply. Signals Were Wrong Here’s our problem now, particularly for the new graduates: Those signals were wrong. In fact, if you want a snapshot of the impact of what happens when a bubble sends inaccurate market signals, ask yourself this question: How many people do you know who became real estate agents over the past five years? In hindsight, does that make much sense? In the case of the financial industry, salaries had become rock-star huge, both for new graduates and for Wall Street veterans. (In fact, I would venture that the “stars” in finance were making a lot more than most successful rock musicians.) When we were in the midst of it, people like me assumed that those salaries reflected real value for the economy – that we’d found more efficient ways to allocate capital and reduce risk and that the people who’d come up with those innovations were being compensated for their innovation. Now it turns out that Wall Street hadn’t really built a better mouse trap. Much of what was going on was just reckless speculation with borrowed money – more like tearing up the old mouse trap and selling it for scrap. At best, these complex financial products offered minimal improvements over what we already had; at worst, they squandered enormous sums of capital and devastated the financial system. When smart young graduates were lured to Wall Street (and related jobs) by staggering starting salaries, they were making the same mistake as the Florida condominium developers. The problem was NOT greed; self-interest is and always will be at the heart of market behavior. The problem was that self-interest is a disaster when the market signals are wrong. It’s like giving someone a bad map and then criticizing their driving when they show up in the wrong place. Smart People, Bad Choices With real estate, that means we now have empty subdivisions and millions of homes in foreclosure. In the labor market, the effects were more subtle but arguably more damaging: Smart people could have and should have been doing something else. The clever men and women who made a lot of money designing and trading credit default swaps could have been conducting research on alternative energy, teaching math, practicing medicine, or doing any number of other jobs that strengthen society, rather than making bad bets with borrowed money. The human capital bubble will take time to unwind, just like all other aspects of the larger financial crisis. People followed the money into jobs for which there is now less demand. In my world, college students flocked into economics, not necessarily because they were scintillated by its ability to predict human behavior and make the world a better place but because it was perceived as the best route to Wall Street. But in the long run there is good news, too, though it may not be much immediate solace to the college graduates who are now moving in with their parents. First, a tough job market will lead to a healthier job search for young people. Nothing focuses the mind like struggling to find a job rather than having one handed to you. I watch students participate in “corporate recruiting,” which is the process in which firms come to campus and make it enticingly easy to take a lucrative job. It’s a stunning opportunity for smart young people who know what they want to do; it can be a sad trap for those swept along by what everyone else is doing. Twenty years ago I opted not to participate in corporate recruiting. After graduation, my friends had jobs; I was broke, unemployed, and unhappy. It was an awful stretch, but it also forced me to think hard about what I really wanted to do and then go out and find it. (I wanted to be a writer.) Second, the post-Wall Street collapse job market will be healthier in the long run for the economy, as smart people do other things. It’s the human equivalent of NOT building unneeded condominium developments. The economic tragedy is that some of our smartest graduates took the big salaries on Wall Street (and in law firms doing Wall Street work and so on). Those folks could have made significant contributions somewhere else. That problem is now fixing itself.”
My $.02 on this: I know this article is more catered towards the MBA crowd but the MBA and CFA are very similar vehicles that either helps you enter the industry or advance your placement within. The individual financial gains from working in the financial services industry is disporportional to the significance of the services that are provided to soceity as compared to other industries. Would the creation of another exotic derivative product produce more societal gains than improving communication technology (cellphone, broadband, handheld devices). Is the maintainece of wealth or possibly the increase of wealth for a company, the wealthy, or even the general public more important than finding cures for the prevalent terminal diseases such as the various forms of cancer, heart and brain diseases. Finally, the allocation of funding from those who have to those who need is the most important service that is provided to society however even the importance of that is probably less than the products/services produced by the energy industry. As the financial industry contracts and corrects itself, I think there will be a decrease in the number of people trying to seek entrance. Hopefully the industries mentioned above are receipents of this transition in human capital.
This writer needs to get out of his elite little bubble, no pun intended. Investment banking and consulting are very very small–by labor standards–portions of the economy. It’s HIGHLY unlikely that a substitute career for these consultants and bankers would have been, say, engineering or architecture, skills that could be used for, say, green technology, or medical school. Most of these Ivy League schools don’t even offer quality/economical engineering/architecture programs. I mean, I WENT to a top engineering/architecture school (ranked in the top 25 and #1, respectively) and virtually no one desired to work in financial services. There is a labor bubble here, but the crux of his argument–that there could have been career substitutions to these more quality career paths–is absurd on its face. How many Ivy League grads with 100-200k in debt, or from wealthy families, would exit to become math teachers BECAUSE Wall Street wasn’t hiring?
You went to CMU? I know some products of it’s arcitecture program…yeah, they pretty much never considered finance.
Let me guess–Micheal Lewis? What a loser…
Not CMU, the #1 ranked program in…2007 I believe (last rankings I saw and my graduation year). But I digress. The point is, the author is making, I believe, a patently false assertion.
good thing that humans are a bit more ellastic and mobile than mcmansions on arizona golf courses 
-A lot of these skills are transferable after all. - I’ve always believed that the value of the ‘pedigree’ of completing a degree/MBA, whatever at a top program is not necessarily so much the skills learned, but also the inherent professional qualities it ostensibly proves you have… intelligence, work ethic, time management skills, etc. A Harvard MBA may have a hard time getting an IB position at Sachs right now, but there should be no issue in getting a decent paying job somewhere- question is whether they are willing to give up on their dream… and maybe pride.
How about capping the F U money via taxes and using the tax revenues as grants for low paying high social impact jobs? Would that entice the highly leveraged Ivy League Grads?
There will never be a human capital bubble. Ever. This is the knowledge century. This will be prime time for human capital and who knows how long it will continue for or when it will stop.
A pretty lame article. A lot of generalizations, and little use of empirical data. Who wrote this and where is the link? And yeah, people like M. Lewis are busy promoting their books in this age indeed…
philip.platt Wrote: ------------------------------------------------------- > There will never be a human capital bubble. Ever. > > > This is the knowledge century. This will be prime > time for human capital and who knows how long it > will continue for or when it will stop. Yes, this is the human capital century…the last century before the machines take over.
^somebody watched Terminator Salvation too many times.
macrie69 Wrote: ------------------------------------------------------- > How about capping the F U money via taxes and > using the tax revenues as grants for low paying > high social impact jobs? Would that entice the > highly leveraged Ivy League Grads? sure, because government intervention through the use of taxation/subsidies have proven to be beneficials to economies in the long run.
buddha Wrote: ------------------------------------------------------- > macrie69 Wrote: > -------------------------------------------------- > ----- > > How about capping the F U money via taxes and > > using the tax revenues as grants for low paying > > high social impact jobs? Would that entice the > > highly leveraged Ivy League Grads? > > > sure, because government intervention through the > use of taxation/subsidies have proven to be > beneficials to economies in the long run. Yep, like the highly profitable passenger railroads…TIC
Last I heard there was no profitable commuter rail service in the world, they all survive with gov’t subsidies. Anyway, railway service does have a substantial net benefit on economy. Imagine cities like NYC, DC, or Chicago without commuter rail or with rail costs at twice their current rates?
Blah blah blah What about the CFA bubble? What about all those aspiring lawyers who ended up chasing ambulances and closing on houses? Law of human nature dictates that 1. people are driven by emotions 2. the average individual isn’t too bright 3. people who know how to make money will find away to make money no matter what
LBriscoe Wrote: ------------------------------------------------------- > Last I heard there was no profitable commuter rail > service in the world, they all survive with gov’t > subsidies. Anyway, railway service does have a > substantial net benefit on economy. Imagine > cities like NYC, DC, or Chicago without commuter > rail or with rail costs at twice their current > rates? TIC = tongue-in-cheek. But I agree. Passenger rail is important–and there is a long history of gov’t-instituted profit caps and over regulation that destroyed the industry. Now, we have a gov’t subsidized joke in Amtrak that hasn’t produced a profit in 3 decades.
Lewis is ultimately wrong. Loving what you do is great. So is world peace and an end to hunger. But the hard reality is that for most people making money is just as important for both practical and emotional reasons. *Especially* those grads weren’t irrational. If you can leave undergrad for six figures, why the f*** not? Even if it’s for a few years and not something you “love” doing. (Besides, how many people “love” the nuts and bolts of their day jobs anyway??) This Board for instance. Most of us are here because we WANT to be. Most people in general WANT to make a decent amount of money. And that goes for risk-takers or opportunistic people in ANY field. There are plenty of engineers, doctors, journalists, lawyers, and others who are enterprising enough to mint a fortune some new idea and make just as much money as an I-Banker would (LOL, perhaps the likes of blowhards like Tom Friedman, Bob Woodward, and Michael Lewis included). You can compare them to their “regular” compadres who work for someone else just as money managers deride the retail side. “There is always a bull market somewhere” I once heard Jim Cramer say. Not that he’s all that smart these days (actually, quite the opposite), but I would add that there are two types of them: one through making money by finding value, and one that’s derived from selling bull$h**. This is a CFA board yo. Let’s just focus on the former…
macrie69 Wrote: ------------------------------------------------------- > Believe me, I didn’t predict the crash; I’d be a > much richer man if I had. If anything, I talked > myself out of believing that there were problems > afoot because Because you’re an idiot! Next…