The Occupy protesters have targeted their anger at Wall Street, the banks and large corporations. Some seem willing to condemn all capitalism as evil. Apparently they have not heard the news that the Soviet Union has collapsed and has been replaced by ruble billionaires, or that formerly Communist China is a major investor in U.S. Treasury Bonds. I would suggest that our current economic crisis is not caused by capitalism but a by distortion of capitalism that has hijacked our economy.

The quaint old idea of buying shares in a company in the hopes that it will succeed and you will share in its good fortune is as out of date as voicemail, landlines and complete sentences. Certainly there are some companies traded on Wall Street that make real products and provide real services. They employ real people for real wages, provide employee benefits, and some even share their profits with their shareholders. But investing in companies like that for long-term growth or dividends is so 20th century. It has largely been replaced by financial engineering.

Financial engineering applies mathematics, statistics and computer algorithms to decisions related to financial trading. These techniques were given new credibility in 1997 when the Nobel Prize in Economics was awarded to Black, Scholes and Merton for a “new method to determine the value of derivatives.” The Black-Scholes method was particularly popular in calculating the value of stock options in the glory days of Silicon Valley. A stock option is a form of derivative in which you are not valuing the underlying share of stock, but the value of owning an option to purchase shares at some future time.

Myron Scholes and Robert Merton joined the board of directors of Long Term Capital Management, a hedge fund. By investing largely in derivative interest rate swaps, Long Term Capital Management initially produced spectacular annual returns that would have made Bernie Madoff envious. However, they lost $4.6 billion in four months in 1998 by speculating in the newly capitalist Russia and went out of business in 2000.

Lest the Occupy protesters think that such financial shenanigans are the sole province of the dastardly Republicans, it is worth considering the plight of Harvard University under the presidency of Larry Summers, who was Treasury Secretary in the Clinton Administration and chairman of Obama’s National Economic Council. The venerable university, under Summers’s leadership, lost about $1 billion by “investing” in interest rate swaps.

Financial engineering techniques are particularly used in high-frequency trading, where computer algorithms continuously analyze market data to find trading opportunities that may exist for just minutes. Trades are executed by the computer capturing fractions of a penny per share, but moving in and out of the position several times per day. By the end of the day they can achieve significant profits, and they liquidate their position at the end of each day. The more volatile the market, the better the profits. It has been estimated that high-frequency trading now accounts for over 70 percent of the equity trades in the United States and was responsible for the 1,000-point “flash crash” in the Dow Jones on May 6, 2010. And they call that “investing.”

So if the Occupy protestors in Oakland, San Francisco and Berkeley would like to refine the focus of their anger, I suggest they need not look very far afield. Perhaps they might want to look at that bastion of free speech, liberal causes and social agitation – the University of California at Berkeley. I am not talking about the problems of rising tuition costs or the methods used by the university police in dealing with demonstrators. I am talking about a masters’ degree program taught at Berkeley in financial engineering that trains students to go to work as “quants” – people who run the financial computer trading models.

You may think that I am being unfair in associating Berkeley with some of these problems. If so, I suggest you look at some of the companies for which graduates of the Berkeley program went to work in 2006 and 2007. They include such stalwarts of American industry as AIG, Bear Stearns, Countrywide Financial, Fitch Ratings, Moody’s, Lehman Brothers, Merrill Lynch, Standard & Poor’s, and Wachovia. UC Berkeley was proud of the fact that the average graduate of the program earned about $150,000 in their first year. I should also mention that Berkeley did state that they have revised the risk management portion of their course in light of the recent economic problems. I am sure we are all greatly reassured by that.

AIG went bankrupt but allowed you and me to pay bonuses to their executives. Bear Stearns lost so much money that the Federal Reserve Bank of New York (then run by current Treasury Secretary Timothy Geithner) forced its acquisition by J.P. Morgan Chase. Countrywide Financial and Merrill Lynch were acquired from the trash heap by Bank of America, and Wachovia by Wells Fargo. Standard & Poor’s, Moody’s and Fitch gave a AAA rating to collateralized debt obligations (CDOs), which were batches of mortgages including some on which no mortgage payment had ever been made. Having done such a good job rating CDOs, Standard & Poor’s then decided in 2011 to use their credibility to downgrade the credit rating of the United States. Warren Buffet probably described the value of Standard & Poor’s work best when he said that you can take manure, you can collateralize it and securitize it and wrap it in pretty paper, but it is still manure.