Economy: Anger Or Apathy?

If there’s a crisis, why do so few people seem worried? Sure, some people may be concerned for their jobs, or whether they’re going to find one. But the overwhelming reaction to this crisis – in relation to what happened - is apathy.
Partly because it was only very briefly that the leaders of the rich world faced a moment of truth.
For a few days back in October 2008, the voices of politicians and financiers trembled with fear. Even George Bush, the modern high priest of small government, stared earnestly into the television cameras, pleading for Congress to authorize the spending of 700 Billion dollars to save the big banks.
We don’t know what terrified the politicians and financiers. They are competent actors. Putting on a show is part of their job, but I don’t think any director could have choreographed such a reaction. So I assume the fear was real.
They knew the state the banks were in, approximately, but there was something else which struck terror into their faces.

What is truly important to these powerful, wealthy people? What could keep them awake at night? I think they must genuinely have feared they were about to lose their fortunes. Investment bankers are often rewarded with Louis Vuitton suitcase-sized wads of shares in their bank and they borrow heavily against them to buy prestigious apartments and holiday homes. With that at risk, who would not be terrified?

Many banks were also trading on their own account, in other words, taking bets against their own investments, their own clients. When the market tanked, these trades imploded.

Several banks collapsed and many more were days from failure, including Goldman Sachs. There is no better illustration of the plight of the investment banks than this superstar of banking, bailed out with up to $30 billion of public money. Then, it converted from an aristocratic investment bank into a regular mom and pop bank so that it could start trading again with money borrowed from the government, at even lower rates than if it had remained an investment bank. The tale is well told by others.


As for the look of terror on bankers’ faces: there would have been many cases of fraud exposed by the falling markets. In the crash of 1929 these “bezzles” as JK Galbraith called them, were revealed when the tide went out. The two most common: unauthorised loans to board members and trading investors’ money without approval. See below*

You know the type:
"I will just take the money for a while, invest it in the market. I’ll make a huge profit, pay it back and no one will be any the wiser."
Until the market tanks, as it did in September and October 2008.

The governments’ quick action to support asset prices and banks with taxpayers money must have saved hundreds if not thousands of frauds from exposure. For politicians, as the regulators in charge of the financial system, saving face meant saving fraudsters.

Whatever it was, the week of visible fear passed and soon bankers and politicians were swaggering once again, confidently appropriating public money and deciding which banks and companies would live or wither.  

Much of the public seem happy with that. The personal finance writer Cliff D’Arcy talks of his verbal bruising on Yahoo, in which ordinary people posting on the Web called him a doom monger and blamed him, along with professional journalists, for creating the crisis: Comments along the lines of: All we want to do is enjoy our property wealth in quiet and people like you are talking down the economy, talking down the stock market, dissing property as an investment.
My first reaction when I read such stuff is that they’re the uninformed comments of people who don’t want to question their betters but that explains nothing.
In the financial markets, they call a sharp change in values a correction. While our countries may not be facing a depression, they were facing a great correction in asset values. Even that has halted in its tracks. Governments cut interest rates to near zero and flooded the markets with taxpayers’ money. When they ran out of cash they began printing it (actually they create it electronically in the form of bonds).
For many, the fact that asset prices have stopped or paused in their fall is evidence the crisis has passed. Newspapers feast eagerly on green shoots whenever a politician spots them – even if they seem to sprout only where politicians walk.
While no one disputes it was the acts of financiers and compliant politicians that brought the world to crisis, the cost of which we are only beginning to estimate, in the media they’re off the hook. Angry customers briefly queued outside banks a year ago, but predictions of protests, let alone revolution, proved wildly inaccurate.
So why do we so readily forgive those individuals who were prepared to distort the financial system to earn huge riches, and who were saved from bankruptcy by politicians who are instead bankrupting the public treasury?
Perhaps it’s the way we react to events. The Harvard psychology professor Daniel Gilbert writes that we overreact to intentional actions and underreact to those we think are accidents, natural or abstract.
Understanding what caused the financial crisis needs great conceptual skills. It is uncertainly abstract.
But what about moral indignation? According to Gilbert, we overreact to things that offend our morals. If we ever so slightly suspect politicians and financiers of being a cabal looting the economy we should, by this view, be protesting in our millions. Yet there is little evidence that moral outrage is spurring people to action.


Perhaps that’s because we overreact to immediate threats and underreact to things that threaten our long term interests. We underreact to changes that occur slowly over time like the gradual, rumbling, approach of a steamroller.

Some economists have taken seriously the role of testosterone in the huge bets and reckless gambling that led to the financial crisis. But what about our reaction to it? Do men more easily shrug off the crisis? Is that why our newspapers feed greedily on news of the first banks to announce profits since the crisis - even though those profits are just a fraction of the losses and frauds piled up around us?

My friend Tanya suggests that it is better for our mental health to believe that something grotesquely painful was not a deliberate act of evil but an accident or somehow inevitable.

My friend Maria suggests it’s about the difference between women and men. Women confront their feelings and their fears. It is scary to analyse your thoughts and your actions and men are usually to scared to do it.


As a journalist I’d like to think that newspapers and broadcasters are independent. However we can blame the media and that is whole article to itself. Briefly, two points stand out. Few journalists know enough about business or the economy to formulate a sensible question, let alone write an article. That is especially true of television, where business journalists are the poor relation to political correspondents.

Political coverage is often no more than gossip with a dollop of self importance: who’s up, who’s down the greasy pole of politics, to quote what the nineteenth century British prime minister Benjamin Disraeli. Or as teens on social networking sites put it: hot or not?

It’s perfectly possible to pithily explain what’s going on in the economy but try to do it on television and you’ll get barged out of the way by an overweight political correspondent, fresh from another dinner, who wants to tell the audience who he’s just spoken to and what he thinks it means.

As for newspapers, it’s hard to have a lingering moist handshake with financiers and politicians one minute and print a full and true report the next.

UK MPs asked the top UK financial editor why his newspaper had not revealed it knew HBOS bank to be insolvent in the autumn of 2008. My newspaper, he declared, “is not in the business of putting British companies out of business”.

Well, what about the business of reporting the facts as they affect the interests of shareholders and savers?

The writer’s hypocrisy lies in claiming his pen is his sword, while urging others to pick up the real thing. I know that. I’m a writer, a hypocrite.

But how about a little outrage?

* To the economist, embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or even years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in — or more precisely, not in — the country’s businesses and banks. This inventory — it should perhaps be called the bezzle — amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression this is all reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.
 John Kenneth Galbraith, The Great Crash.

See also, The Bezzle, 2008 version.

1 comment:

SN Moving Media said...

This is so well written and so apt.