Market designers pitched crisis auctions partly to win lucrative government contracts

Evidence

In fact, Power Auctions and Market Design, Inc., held the patents for the stipulated clock auction. But the presentation delivered by Ausubel and Cramton for the Treasury listed several additional “Typical Auction Related Activities” (product design; definition of detailed auction rules; auction software specification, development and testing; bidder training; establishment of an auction “war room”; operation of auction; post-auction reports on success of auction and possible improvements for future auctions) for which Power Auctions and Market Design, Inc., could provide assistance. Of course one can’t know the exact provisions that would have been contracted between the parties, since the Treasury scrapped the plan, but given the previous record of market designers, it is entirely reasonable to believe that they shaped their claims with an eye on landing lucrative contracts. For years, market designers had made all sorts of fantastic claims for newfangled markets—They can reverse global warming! Improve access to health care! Redress racial and gender discrimination, without committing “reverse discrimination!” Even achieve “free lunch redistribution!”—so long as you hire their firms to build them to your exacting specifications (after all: “details matter”). They have almost always directed the pitch at cash-strapped governments, urging them in particular to sell off public assets to private oligopolistic concerns; in the case of toxic asset auctions one need only invert the logic. … Unfortunately, no one could much be bothered to scrutinize the claims of market designers. After all, there was a crisis a-brewing. Only a relatively small coterie of market designers ever got invited to participate in market design exercises, and most were partners in a small set of firms with interlocking directorates. In the case of the toxic asset auctions, the job of judging the proposals was assigned to Jeremy Bulow and Paul Milgrom, both partners with Ausubel and Cramton in Market Design, Inc. So much for Chinese Walls and plausible deniability. It doesn’t verge on the wildly conspiratorial to suggest that such arrangements create some perverse incentives when it comes to reining in some of the more fantastical claims (gaining popular acceptance for them improves the firm’s prospects), a fact that has seemed only to encourage ever more extravagant claims: … The crisis was caused by mispricing: investment bankers were able to sell poor securities for full value based on misleading ratings. This mispricing was supported by the absence of a transparent secondary market for these mortgage-related securities. If we had transparent prices, a lot of the bad things that happened would not have happened. In particular the housing bubble would have been much less, and the investment bankers would not have been able to make such clever use of the rating agencies and create tens-of-thousands of senseless securities obfuscating prices. Even a tiny bit of good market design would have averted the financial crisis by preventing its root cause: the sale of subprime mortgages as near-riskless securities. — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 868

Categorization

• XREF: Connects to the reader’s prior knowledge of Bernanke’s and the thought collective’s crisis narrative from earlier chapters. — connects to: Auctions advocates shifted their crisis claims after the fact to fit their designs. — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 863; Market designers flipped their public stance on TARP once they lost auction contracts. — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 874
• SEED: Angle: the revolving door between ‘market design’ academic firms and crisis policymakers as a case study in expertise-for-hire during emergencies.
• SHARE: The detail that Bulow and Milgrom judged the toxic-asset auction proposals while being partners in Market Design, Inc. with Ausubel and Cramton is a cramped insider fact a market-design colleague would appreciate.

Broader Connections

• Market designers flipped their public stance on TARP once they lost auction contracts. #expands (0.90) — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 874