Banning Smart Kids From Wall Street

Posted by: Cathy Arnst on October 19

Calvin Trillin, one of my favorite writers, has come up with perhaps the most spot-on analysis yet of the causes behind the recession. His New York Times Op-Ed piece, Wall Street Smarts, suggests that the roots of the financial meltdown go back to when the smartest kids in class stopped choosing careers in science, math and engineering, as they did in the 1960s and 1970s, and started choosing finance instead.

The theory is related by an imaginary investor that Trillin meets in a bar, a guy who was in college in the 1960s, and watched everything change in the 1980s:

Two things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years they’d have so much money they could then become professors or legal-services lawyers or whatever they’d wanted to be in the first place. That’s when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. That’s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.

As a result, says the guy in the bar, the smart kids started inventing things like “derivatives” and “credit default swaps” that those of average intelligence could never have come up with. Everyone got filthy rich as a result, and no one bothered to figure out how to police these instruments of easy money.

Sounds as reasonable as any other explanation out there, perhaps more so. And it makes me wonder—will the smart kids continue to enter finance, now that its reputation has been besmirched? Judging by the size of the recent Goldman Sachs bonuses ($6.7 billion, more than half a million per employee), Wall Street is still the best place to get really really rich. The nation’s manufacturing base, meanwhile, just keeps withering away. As BusinessWeek Writer Pete Engardio recently wrote in Can The Future Be Built In America?:

The good news is that the U.S. is at or near the cutting edge in most of the emerging product areas. Indeed, the new wave of high-tech devices hitting the market is the payoff from billions of dollars in taxpayer-funded research at federal and university science labs stretching back to the 1960s, when the applications were but glimmers in the eyes of futurists. Now the bad news: Unless the U.S. can magically resurrect its manufacturing base, the good-paying jobs from these breakthroughs will be offshore.

So if your kid is one of the smartest in the class, what career would you like him or her to choose? Should they follow their dreams, or follow the money? And what if their dream is to make Goldman Sachs-style bonuses? Can they land on Wall Street and still maintain some of those old-fashioned values that used to keep greed at bay? Or can they be lured back to the sciences, despite the (relatively) paltry pay, in order to make the U.S. a world leader in producing goods, not services, again? In 20 years, how will their choices shape the nation and the economy?

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