Wall Street Economists: Are They Worth Their Salt?
WALL STREET ECONOMISTS: Are They Worth Their Salt? The answer is obvious. "On the one hand . . . , but on the other hand . . ." Perhaps it's not fair to begin an article about economists with an economist joke, but it is certainly in keeping with their image on the Street. A common element in discussions one has with investors is the eagerness with which jokes and disparaging remarks come to their mind. Even when speaking with the economists themselves, one senses almost an apologetic attitude. They know they're working hard at what they do, but they also know it's not always, perhaps not even often, economics that they are doing. One well-known Street economist sums it up this way: Economists and economics on Wall Street? There aren't many and there isn't much.
The problem is that two very different roles comprise the job of the Wall Street economist, and this results in some serious conflicts. Start with the fact that the economist is not a producer; he's pure overhead. At least in his role as an economist, he doesn't trade, nor sell, nor in any other way produce profits for his firm. So what good is he? One answer, increasingly obvious in recent years, is that he's a public relations man. His primary job is to burnish the image of the firm he represents, hopefully by providing forecasts and analyses that prove insightful but, in any event, by keeping himself in the limelight, which means the newspapers and television.
This function contrasts to the situation ten to fifteen years ago when the economist's "other function," producing good economic analysis, was primary. Indeed, according to Albert M. Wojnilower of First Boston Corporation, twenty-five years ago, when he was just getting started, the function of the Wall Street economist was strictly to be an internal advisor to "trading management." In those days the object was to "stay ahead of the clients -- in every respect." The point was simple: Protect each and every insight an economist came up with, and use it for the principal purpose of producing profits for his firm. In those days, an economist might have been fired if his name appeared in the newspaper, says Wojnilower.
INHERENT CONFLICTS IN THE JOB
What are the conflicts between being a good economist and being a good representative for your firm? Perhaps the most important is the self-imposed intellectual isolation. Among economists in the academic world, as well as for those in government, consultation with one's colleagues is standard operating procedure and considered essential to doing good work. Joint articles or books are commonplace, and one will often see footnotes acknowledging the help of a dozen or more colleagues. The contrast on Wall Street is striking. It seems hard to believe, but some Street economists claim not even to know the names of their competitors. There appears to be little or no contact among most of them, (1) professional or social.
The lack of any substantial professional interaction is perhaps understandable in a business where few aspire to expanding the frontiers of the science. (2) Rather, the objective is to interpret and apply the best of received doctrine and, more important yet, to convey clearly and in a timely fashion those tidbits of insight that can produce a profit (hopefully today!). In such an environment, collaboration obviously is inappropriate; the economist is being paid by one firm to produce an individual, proprietary product and must, essentially by definition, work alone.
For example, David Levine, an economist at Stanford C. Bernstein & Co., prefers to receive his intellectual stimulation from other investment professionals at his firm and from clients, rather than from the competition. In this respect, he is typical of most Wall Street economists. Consultation, or even informal get-togethers, among sell-side …