Robert Barbera has been working on ‘The Street’ for twenty five years. He’s seen major banks crumble, seen bubbles inflate and pop, and seen six presidents come and go since he received his Bachelors and Ph.D degrees from Johns Hopkins. For the last seven years, Dr. Barbera has been returning to Hopkins every spring to share his unique perspective with JHU undergraduates in his class, ‘The Art and Science of Economic Forecasting.’
I had the pleasure of sitting down with Dr. Barbera this week to talk about everything from the crises in the Middle East and Japan, to his time as a Hopkins undergrad.
Why were you interested in teaching an undergrad class at Hopkins?
I wanted to try my hand at pulling together an alternative macroeconomic construct that better reflected what economic practitioners are doing in the real world. The old models all basically said the Fed controls the interest rate that drives the economy, which is nonsense. The Fed controls an interest rate, which has influence. But the Fed really drives Wall Street, and Wall Street drives Main Street. The game has to be to put finance in the center between the Fed and Main Street.
Dr. Barbera is a generous supporter of the Center for Financial Economics, and has been able to work closely with many of the faculty. One of the main attractions of the CFE, he says, is the variety of work experience that the faculty has, whether it is working at the Fed, the IMF, or on Wall Street.
Where do you see the CFE going in the next 10 years?
Ideally from my perspective, CFE could be one of the landmark academic institutions in squaring the circle that we just talked about. CFE is perfectly set up to respond to the challenge of restructuring the approach to teaching macroeconomics that rigorously highlights the links from the world of finance to policy instruments and into Main Street.
Dr. Barbera has worked as the Chief Economist at Lehman Brothers and at EF Hutton. Prior to that, he was an economic analyst for US Senator Paul Tsongas. He’s worked at macroeconomic consulting firms, and is now the Chief Economist at a macroeconomics-focused hedge fund.
How has teaching at Hopkins changed the way you work?
As a Wall Street economist trying to bring to bear insights to institutional investors, I simply became a better macroeconomist. I became much more in tuned to what the academic economic thinking could bring to real world questions. My clients found that I was much more thorough, and that I had more to bring to the table. In effect, coming to Hopkins allowed me to re-tool to their benefit.
Could you talk a little about your class, The Art and Science of Economic Forecasting?
We take the mainstream macro, and make serious adjustments. We work to understand the data behind some of the economic constructs, and learn to make changes in some of the theoretical formulations.
In addition, students start to understand how to process the nonsense that emanates from Wall Street day in and day out. How do you separate the signal from the noise? How do you filter out 95% of the garbage from CNBC, or the Wall Street Journal? How do you recognize the right wing diatribes from the Journal, or the left wing lunacy of the New York Times? What we do is try and get out from under all of this to figure out what is actually going on in the world.
You require the students to make their own forecasts?
Yes. The first two years I taught the class, I didn’t do that. I knew something was wrong because I’ve been giving speeches about the economy for 30 years, and my clients really paid attention.
What I found was this: Over the first couple of years, as the class wore on, the best students began to tune me out. I realized that it was because the best students had figured out that even though I had all these thoughts and theories, I didn’t know what was going to happen. I realized that what I had to do was turn the table on them. They had to try to predict what was going happen. They had to figure out what would happen to GDP, or the stock market, or the dollar vs. the yen. They realized that even though I didn’t know, I had a lot of ideas that would help them work it out, and we reattached. It forced them to look the pervasive uncertainty in the eye.
How have the recent crises the Middle East, and Japan affected your work on day-to-day basis?
Only a soothsayer can predict exogenous shocks. In the last 90 days, we had two. One was very serious; the other potentially wasn’t that serious, but it had the ability to generate enormous anxiety.
First Tunisia goes, Egypt started to shake, and Libya looked shaky. Remember, in the business of predicting financial asset prices, you aren’t in the business of making humanitarian judgments. From a dollars and cents point of view, Tunisia, Egypt and Libya didn’t mean a thing. But if Saudi Arabia looked like Egypt in the next 90 days, for example, then we thought oil prices could go to $250 per barrel and it could be a global recession of enormous proportions. You had to sit there and say, for example, what’s the probability that a country like Saudi Arabia could be caught up in the turmoil? People say we could have seen it coming in the Middle East – and they may have been right – but you could have seen it coming for 20 years.
The Japan piece was fear of fear itself. During the worst days of the stories about the nuclear reactor explosions, some people were arguing the worst possible outcome was a fifteen square mile evacuation area, and then there were other news reports about a radioactive cloud heading towards Los Angeles and San Francisco. If that’s your bid ask spread, it’s very hard.
You always tell your students to stay humble. What do you mean when you say that?
If you really forecast, and if you take risks, there will be times when you are hysterically wrong. There was a quote that John Kenneth Galbraith was famous for – There are only two kinds of economists: Those who don’t know, and those who don’t know they don’t know. You need to stay humble in the business, because sometimes, you will get your butt kicked.
Speaking of kicking butt, did I mention that Dr. Barbera was an All-American lacrosse player at Hopkins? So much for stereotypes. If you want to learn more about Dr. Barbera’s insights, check out his book The Cost of Capitalism, or for an interesting historical perspective watch his interview with Charlie Rose in January of 2008, just before the Bear Stearns collapse.