Milken Institute Takes Issue With My Post

The headline above may overstate the case a tad. I sincerely doubt the Milken Institute took much note of last Friday’s offering, Hubris, Denial, and the Financial Services Culture. They had plenty of coverage by the mainstream media and reportedly regard blogs with some skepticism (the person who was responsible for our panel on econobloggers apparently had to push quite hard to get it). However, the organizer was unhappy with the post and sent me a long e-mail taking issue with its observations.

I forwarded it to Felix Salmon, since I believe he was responsible for getting me on the panel and was concerned that I had now put him in an awkward position. To my surprise, he e-mailed both me and the organizer saying (among other things) he thought exposing the difference in views was a positive and argued that it would be good if I posted the Milken Institute e-mail to present its perspective.

I had drafted a reply and waited 48 hours in case the Milken organizer objected to her e-mail being published (she did work very hard on our behalf and I do not want to cause trouble for her). Since I have not heard from her, below first is the her e-mail, then my e-mailed reply.

Let’s start with the person at the Milken Institute who organized our panel:

First, I am sorry that you found the Milken Institute Global Conference experience so distasteful. I, of course, don’t want anyone to have such a terrible experience at any event, but also, because I personally spent many hours and much energy on your personal attendance, find it discouraging that you left with such a negative perception of what we do here.

Second, because I know of your distaste for presenting information and opinion out of context, I did want to point out that the Milken Institute is, by its mission, focused on using financial innovation and capital-markets solutions to address issues. (Also, please note that it is the Milken Institute Global Conference, not the Milken Conference) From our web site:

“For more than 15 years, the Milken Institute has used capital-market principles and financial innovations to address social and economic challenges, from energy independence to poverty, here in the United States and around the world. We help business, foundation, academic and public-policy leaders identify and implement new ideas for creating broad-based prosperity. “

It is a bit disingenuous to criticize a conference of ours for having a focus that is clearly stated in our mission. (No one goes to the library expecting to find a new pump for their aquarium.) If you were looking for a conference that seeks to increase governmental action to address issues, there are many out there – we attend them regularly in our pursuit of partnerships and ideas in finding solutions.

Third, also based on your passion for presenting accurate facts, no one at the Milken Institute denies that NIH provides funding for research in medical advancement. However, as noted in our 2006 report, “Financial Innovations for Accelerating Medical Solutions:”

“Since 2004, NIH research funding has remained static or decreased, based on adjusted dollars. In fact, the most recent budget cut of 2006 is steep enough to bring NIH R&D below the 2003 funding level in real terms, erasing the increases of previous years.1” http://www.milkeninstitute.org/publications/publications.taf?function=detail&ID=580&cat=finlab

We simply believe that this funding decrease is insufficient to address the growing threat of chronic disease, etc. and can’t depend on the government to do it in a timely or effective manner.

The capital markets do have a role in achieving solutions to many problems, problems that governments are either unable or unwilling to address. Reliance on government solutions has, at times, also resulted in disastrous ethanol subsidies, a lack of available credit for SME in emerging domestic markets, and exacerbated health crises around the world by dictating that funding must be allocated to abstinence programs instead of addressing the health issues. And yes, the Milken Institute is committed to bring financial innovations, the capital markets and a belief that we can be a part of creating a better world in order to address those issues.

I encourage you to seek out, and attend other conferences. I think you will find that events and organizations that are voluntary do represent a certain part of a spectrum – whether you are at an ACORN conference or the World Economic Forum. I look forward to reading on Naked Capitalism about such events that gather more than 3,000 attendees from around the globe, spend three days looking for solutions of any kind to the many challenges that we face, and capture even more versatility than a group of this size and caliber that can support both the capital markets and Obama.

It may be, however, that this kind of intellectual agility is only available to those of us who can retain hope and optimism even in dark times.

Finally, I ask that you not overlook the microcosm of the Econobloggers panel in your analysis of conformity. I noted that most of the panelists were extremely displeased that the moderator was so opposed to the panel’s group thought on the issues presented and that he held a bias for mainstream media, let alone the stoic editorial page of the WSJ. Perhaps all of you expected that I would choose someone as a moderator that would nod along with the group and support the consensus. I didn’t, because that would have been boring and uninformative. I chose a moderator who could present a sentiment that the audience that I wanted to reach may have come pre-disposed to (so few of them were blog-literate), so that my panelists could have an opportunity to confront that sentiment live and in-person – and each could be judged on the merit of their argument. And, for the most part, the panelists found it appalling and have publicly stated so.

I wish you success in your blog and your book endeavors.

Now my response:

I gather from your message that my post offended you, and I am very sorry to learn that. I know you and your colleagues put a tremendous effort into making the Conference come into being. At the same time, as it has gotten larger and more widely covered every year, the expectations for it rise as well (at least that is the impression I got from the sample of participants I met)

I am disappointed that you cannot see my comments from the perspective of what the British call “the loyal opposition.” The Institute has every right to present a pro-market point of view and that vantage has a lot of merit.

However, I fear the point I was trying to make was lost: the effort to present that view was more heavy handed than the participants and yes, organizers might realize, and that undermined its effectiveness considerably. If people create the impression, however unintentionally, that they will not allow opposing points of view to be aired, it suggests that they may have something to hide, which in this case would be that their arguments would not survive tough scrutiny.

You have a sophisticated audience; they can read between the lines. Why suggest that the capitalist cause has a glass jaw?

In addition, I am not at all certain what “capital markets solutions” means. As my colleague Amar Bhide pointed out in a classic Harvard Business Review article in 1993, “Efficient Markets, Deficient Governance,” the deep, liquid US securities market are the result of regulations. Bhide, a former proprietary trader, says that in the absence of SEC regulation, no one would trade a promise as ambiguous as an equity on an arm’s length, anonymous basis; the only way you could have equity investment in the absence of disclosure and protection against market manipulation and insider trading would be via private equity type relationships. Capital markets presuppose regulations on, at a minimum, disclosure and settlement. So I am at a bit of a loss to understand the hostility to regulation given the concept of “capital markets principles.”

I was well aware that the Milken Institute stands for a pro-market viewpoint, but I was also under the impression that it was dedicated to finding the best solutions. When I was at McKinsey, not only was dissent something the firm extolled as a value, but it also accepted, even expected, that two different teams, given the same client problem, were likely to come up with different recommendations. Thus it seems unduly limiting for the Conference to take the viewpoint that pure private sector solutions are the best. Indeed, the Conference’s own posture seems internally inconsistent. Why are public-private partnerships a good thing when Arnold Schwarzenegger is in the room and the private sector has the prospect of getting access to government resources, but any other mention of the government elicits derision?

We are in the midst of the worst financial crisis since the Great Depression (note I said financial; the jury is still out on how substantial the economic damage will be); the fact that the Fed and other central banks have created new facilities and implemented multiple large scale interventions says how serious this is. As of Friday’s increase in the Term Auction Facility, we are now up to nearly $500 billion of market support from the Fed alone. Yet admitting to that considerable failure of the marketplace and the government’s substantial and active role in preventing a meltdown was somehow verboten.

More friction would have upped everyone’s game. It’s much more interesting to watch discussions where the participants are pressed to explain their views. I am a bit surprised to see you imply that I objected to Dean Rotbart’s confrontational approach. I told my fellow panelists, and they all seemed to agree, that having Dean be provocative made for a much more lively discussion. The feedback I got from everyone was very positive. It was because Dean pushed all of us on some issues and kept at it and did not let us off the hook if he though our responses were incomplete.

Now CEOs can’t be prodded in the same way, but a skilled moderator can say they are taking the position of a devil’s advocate and tease it out.

The very fact that you invited me to speak, even though the blogger panes was a minor panel, led me to think the Institute was interested in hearing dissenting views as a means to arrive at better solutions. You had said you were a reader of the blog, If so, you would know that I have repeatedly spoken about market failures and externalities and believe that the financial sector’s unwillingness or inability to manage its affairs in a way that is not detrimental to society means it needs to be regulated more tightly.

I am thus a bit perplexed as to your reaction to what I wrote. I am told that the Generation Next paned, Philip Jennings said quite a few provocative things, more controversial than anything I posted. Since he spoke at Davos, I assume you knew his bent as well.

As for ethanol subsidies representing a failure of policy, consider: the need for measures to combat global warming is an example of what economists call externalities, when the price of a good does not reflect fully all of its cost or benefits. Pollution is the classic example of an externality. Even conservatives such as Greg Mankiw, former head of the Council of Economic Advisers under George W. Bush, recognize the need for government intervention to deal with externalities. Mankiw favors what are called Pigovian taxes, such as a carbon tax, to cap and trade regimes. Thus Mankiw would agree that ethanol subsidies were not the best approach. but intervention of another sort was the required solution. Yet based on what I saw, that perspective would not have been well received at the Conference.

As for NIH (and other federal funding, the NIH is the main but not the only source of funding, which is why it is hard to get good numbers), as you know, drug development is a very long process (often ten years), and those drugs that make it have 17+ year patent protection. Thus the drugs we use now are the result of past government support.

As for the shortcomings of the Wall Street Journal editorial page, those are not simply the views of the panel, but of scholarly studies:

http://www.nakedcapitalism.com/2007/01/on-accuracy-of-wall-street-journal.html

I trust that you and your colleagues are pleased with the results of this year’s Global Conference and are moving forward with your many initiatives. Best of luck with all your efforts.