Sunday, May 22, 2011

la Crise Financière II

"The Tao of heaven is like the bending of a bow.
The high is lowered, and the low is raised.
If the string is too long, it is shortened;
If there is not enough, it is made longer.

The Tao of heaven is to take from those who have too much
     and give to those who do not have enough.
Man's way is different.
He takes from those who do not have enough
     to give to those who already have too much."

                                       --Lao Tzu

I ended the last post by linking to the animated version of David Harvey’s lecture.  It’s a good jumping off point for this second (and hopefully last) part of the discussion.  Harvey unabashedly analyzes social phenomena from a Marxist perspective.  This is useful because there are only two aspects I still want to touch on—the predictability of the crisis and the exercise of social power within it. 

Think for a moment about the people who surround you in your daily life.   The people you work with regularly, the people you interact with through social media, your family, friends, etc.  How many of them are significantly wealthier than you are?  How many are much poorer?  How many have positions of way greater responsibility than you do and  how many have much less?  How many of them have mental or physical capacities different from your own?  What about the age factor?

The thrust of the thought experiment is that you probably know very few people whose lives are extremely divergent from your own.  Rich and or powerful folks tend to hang out with each other, poor and weak folks tend to do the same, and the pattern repeats all the way across the in-between.  The predictability of the financial collapse is related to this in no small way.

Lots of national leaders, corporate leaders, and mainstream media folks have said in one way or another that the financial crisis was not predictable.  I think the best example of this is from an interview with Dick Cheney:

AP: So let's start with the economy. Did you ever think that you'd be—that we'd be finishing a two-term Republican presidency with a federal budget deficit so high, with bailouts and government spending sort of run away?

VICE PRESIDENT CHENEY: No, obviously, I wouldn't have predicted that. On the other hand I wouldn't have predicted 9/11, the global war on terror, the need to simultaneous run military operations in Afghanistan and Iraq, or the near collapse of the financial system on a global basis, not just the U.S. 

Normally I’m pretty skeptical about the words that come out of the mouths of national politicians.  In this case, I take him at his word.  Here we have the most powerful, most policy-involved Vice President in the history of the US.  He had been given complete access to the entire American Intelligence apparatus, had unfettered access to the President and his advisers, a staff of very smart people, and could call up virtually any businessman or academic on the planet.  For all this, he knew of no one who could have predicted the financial crisis.

Another example:  Luke O’Connor outlines a pamphlet from Zurich Advisors where they had deemed the financial crisis as an event that could happen, on average, once every 10,000 years.   This is an organization whose very existence is justified by its ability to measure and mitigate risk.  As Dr Lo pointed out, financial engineers needed to only look back 25 years to the housing market of the early 1980s to understand their risk position.

Borrowing a number from the National Small Business Association, 25% of Americans are directly employed by small businesses.  If we assume another 10% are either supported by non-profit organizations or underground markets, that leaves 65% of the population employed and/or provided-for by large corporations and government entities.  Here's the rub of all this--the decision makers in the upper hierarchies of these organizations are all living and working in the same sliver of our social world.  Our economic and political systems cloister them from those who are poorer (99.9% of us) and therefore differently informed.

This interview with Maria Bartiromo is a perfect example.  She spends the first five minutes outlining her privileged position in the financial media.  At twenty minutes in she describes the reasons she believes public assistance to financial firms was justified.  Her reasons culminate in the statement that in this country we don't leave those in poverty on their own or let them go hungry.  I gasped when I heard her say this--because most of the millions of Americans in poverty in the US are left to fend for themselves in very substantial ways.  Those in poverty do not live in safe neighborhoods, stay in decent houses, go to good schools, receive adequate health care, and many, many go to bed hungry.  But being wealthy and well connected means she never confronts it.  The social mobility numbers for the United States tell us that she probably never will.  Her material success makes her a less informed, less capable journalist and she doesn't even know it.

Which brings me to my first point--there were many people who saw the Wall Street collapse coming.  Quite a few bloggers and media personalities saw it coming:  Nouriel Roubini, Paul Krugman, George Soros, Gary North, and Peter Schiff (my favorite) all predicted it.  Quite a few people on wall street predicted it, and made a killing.  Doing manual labor, poor person's jobs for the last 18 years, I personally know several people who saw the financial crisis coming--a couple of them were even able to time it.  However, those in powerful policy-making positions, those with the most influence in mass media, and even the best-known religious leaders in the United States and in the world had no insight.

Part of this can be chalked up to confirmation bias--the neurological tendency of the human mind to preserve it's networks, and it shows up as cognitive inertia.  This is closely related to the maintenance of social position.  In fact, if individuals guessing at trends and values know ahead of time what others are guessing, they have a tendency to conform to the group mean.  As J.M. Keynes notes in chapter 12 of The General Theory, "Worldly wisdom teaches that it is better for reputation to fail conventionally then to succeed unconventionally."

Which brings me to my more important point; that the financial crisis allowed for an international display of social power.  In his film, Inside Job, Charles Ferguson makes the case that the world's leading economists and financiers had to have known how risky the global financial system had become and deliberately mislead the public and government officials around the world to facilitate large-scale looting of the financial infrastructure.  While I didn't find his case convincing, he powerfully illustrates the depth of corruption and conflicted interest within the economics profession.  He also shows that elected officials either lack the knowledge or the will to resist conventional economic wisdom.  By the end of the movie, I couldn't deny that the decade of the 2000's is clear evidence that the economics profession is undeserving of my trust or anyone else's.

I don't go as far as Ferguson does to indict the financial industry in general.  To be honest, the folks in charge of it just ain't as smart as their detractors make them out to be.  What wealthy executives and investors do have, however, is a vast amount of collective social power.  So when their businesses and bonus pools were endangered they cried to governments around the globe for immediate capital assistance.  In the United States, it took 10 days from initial proposal to Presidential signing to create the Troubled Assets Relief Program.

For comparison, it took nearly 10 years to pass the dirt-cheap  9/11 responders health care bill.  In total, more than $8 trillion has made available to the financial industry by the United States government.  But an amount equal to less than 2% of that has been made available to assist local school districts dealing with the aftermath of the financial meltdown.  I'd argue that virtually the entire chain of events leading up to and following it can be understood in terms of Isaiah chapter 1, chapter 77 of the Tao Te Ching, and chapter 5 of the Dhammapada.

My final observation is that during the financial crisis, as with natural disasters, the only reliable sources of insurance were sovereign governments.  Go figure.

No comments:

Post a Comment