THE BLOG
08/20/2009 05:12 am ET Updated May 25, 2011

The Nobel Crisis

Everyone and their brother know that we are immersed in a variety of, familiarly-named, crises: the credit crisis, the mortgage crisis, the subprime crisis, the banking crisis, the derivatives crisis, the ratings crisis, the capitalism crisis, the hedge fund crisis, the regulation crisis, the bonus crisis. But, quite possibly unbeknownst to many, there is another category to add to the list. Among the casualties of the current malaise lie not just dodgy home-financing practices, reckless investment bankers, off-track AAA labels, fraudulent fund managers, or asleep-at-the-wheel policymakers. There is another, rather quite distinguished, entity to add to the pot, namely the so-called "Nobel" Prize in Economics, in particular the awards showered on the financial economics subdivision. The current malaise signifies, as much as anything, a devastating blow to the credibility of said trophy. We are, without a doubt, in the midst of an inescapable Nobel crisis.

Why? For two main reasons. Not only did the most sacred tenets of finance theory (all endowed with the "Nobel" in the past couple of decades) disturbingly, and no entirely unexpectedly based on the historical record, fail before and during the chaos, but it could be reasonably argued that they contributed decisively to the unleashing of the troubles in the first place. It is extremely reasonable to argue that without the ubiquitous presence of flawed mathematical concoctions in financeland, to which the Nobelization process provided a key push by offering iron-clad official legitimacy and backing, the crisis would not have been as devastating, or even have taken place at all. Clearly, without the fall of the investment banks and the AIGs there would have been no global bloodbath, and the position-taking by those players that eventually sunk the world was aided and abetted, without a doubt, by quantitative machinations that "predicted" very low risk and that yielded very generous creditworthiness estimates. The "Nobel" in Economics, by directly rewarding some of those unworldly machinations and indirectly sponsoring the misplaced mathematization of finance, had a large hand in the ugly consequences.

But not only has the "Nobel" been found guilty of prizing flawed and deleterious theories, the "Nobelists" themselves have enjoyed terribly lacking performances in the markets. We are all familiar with the system-threatening collapse of hedge fund LTCM in 1998, and with the prominent role of "Nobelists" Robert Merton and Myron Scholes in the entire affair. But in recent months we have learned that the trophied academics have failed in the real business world, yet again. If Scholes' fund had to halt redemptions after suffering substantial losses, Merton´s consultancy firm (postulated on the promises of "scientific finance") had to file for bankruptcy, following several years of paltry results.

For some of you bothered by the omnipresent quotation marks accompanying the Nobel terms throughout this article, let me clarify. Simply put, the "Nobel" in Economics is not a real Nobel Prize, and never has been. Alfred Nobel never said anything about an award that didn't cover the fields of physics, chemistry, peace, medicine, and literature (the holy quintet). It was only in 1968, sixty-seven years after the awards began to be disbursed, that Sweden's Central Bank decided on its own accord to establish the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel". The Nobel Prize organization does not (it can't) call it a Nobel on its website.

It is clear that the current economic and financial malaise has delivered a knock-out punch to the intrusive Nobel-or-whatever in Economics. The prized theories did not work and caused harm, the prized theorists succumbed in the real markets. And it may get worse. The Nobel brand may have been transformed into a sales pitch in search of a quick buck, with the glorious label being used to bewitch naïve, qualifications-blinded investors into opening their wallets to finance less-than-robust ventures. Talk about dishonoring Uncle Alfred's legacy.