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Wall Street's obsession with number crunching blinds it to important developments, economist says

  • Most economists are trained much more in the analytics of the numbers than the philosophy of economics and finance.
  • The economist is also now worried younger investors do not realize the riskiness of new trad-able assets.
Henry Kaufman
CNBC
Henry Kaufman

Economist Henry Kaufman believes Wall Street's obsession with number crunching is blinding it to finding important market developments.

CNBC's Mike Santoli spoke with Kaufman, who has analyzed financial markets for decades, in an exclusive interview for CNBC PRO. Santoli asked the economist for his assessment of Wall Street analysis.

"As a result of the quantification of statistics as the result of the computer, we generate a huge amount of economic and financial news, and now most economists are trained much more in the analytics of the numbers than the philosophy of economics and finance," Kaufman said. "And we tend to overlay one cyclical period with another cyclical economic expansion period, and while those periods can vary in magnitude we average it out and we say this is the typical economic expansion and this the typical economic contraction … Well, it doesn't really work that way."

Kaufman is president of Henry Kaufman and Company, an economic and financial consulting firm established in 1988. He previously served as head of research and in senior management of Salomon Brothers and also worked at the Federal Reserve Bank of New York.

The economist is also now worried younger investors do not realize the riskiness of new trad-able assets.

"The management of risk has become far more difficult, far more complex. Large institutions today are not allowed to fail. When you have a marketable credit instrument, the assumption is that it is always trad-able. But that's not true … It's very difficult under the current arrangement to hold the risk-taking in check. We have relatively low interest rates, which makes the arbitraging of risk-taking as an incentive. We have the ability of lower-quality borrowers to be in the market, which also increases the risk-taking, and the central bank is having great difficulty in taking hold over the magnitude of risk-taking."

See here for the full CNBC PRO report and the interview video.