Friday, April 18, 2014
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Who is to Blame?

PRINCETON – Now that the economic crisis looks less threatening (at least for the moment), and forecasters are spying “green shoots” of recovery, an ever more encompassing blame game is unfolding. The financial crisis provides an apparently endless opportunity for unmasking deceit, malfeasance, and corruption. But we are not sure quite who and what should be unmasked.

Leading bankers were initially the most obvious culprits. They presided over institutions that made large profits for a substantial period of time by mispricing risk, and then argued for public support on the grounds that they were too big to fail. They appeared arrogant and overpaid, and were easily demonized.

But what about the political process? Why were the banks not more closely controlled and better regulated? It is not that politicians were “bought” in a simple sense; rather, they convinced themselves that financial innovation opened the gate to greater general prosperity, increased home ownership, and, of course, popular support in elections.

Governments are now vulnerable, and politicians are under attack almost everywhere. Administrations have collapsed in the Czech Republic, Hungary, Iceland, and Ireland. Riots and paralyzing strikes have crippled Thailand, France, and Greece. In Kuwait, the government dismissed parliament. Britain is convulsed by a scandal about parliamentary expenses that has no equivalent since the attacks on “old corruption” in the early nineteenth century.

Recriminations after financial crises have a long history, and they recur in regular cycles. The stock exchange boom of the early 1870’s was followed by collapse in 1873 and a witch-hunt for those responsible. In 1907, J.P. Morgan was first viewed as the savior of the market, and then as the enemy of the commonweal. In the 1930’s, bankers and finance ministers were accused. But for the rest of the twentieth century, the backlash cycle seemed to have stopped.

Today the attacks are not limited to the political and financial establishment. Critics are trying to identify the ideas as well as the interests that were responsible for financial and economic dysfunction. In this respect, the contemporary crisis is unlike the historical analogies, in that it looks as if financial innovation was driven by a set of intellectual and even technological innovations.

Since it is an economic crisis, most people seeking its intellectual roots are tempted to begin with economists, who, with a few exceptions, look particularly discredited. The founder of the rational expectations revolution, Robert Lucas, is endlessly quoted as having stated in 2003 in his presidential address to the American Economic Association that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”

It is also clear that academic economists had an impact on policy. Larry Summers, now the highly influential director of President Barack Obama’s National Economic Council, concluded as a young economist that “financial and monetary shocks are less important sources of depression than we had suspected.” If the economy was foolproof, and if so many good policy options existed to deal with crisis and distress, there was less need to avoid mistakes. Things could always be set right retrospectively.

Other academic disciplines have looked rather smugly at the public humiliation of their colleagues in economics. The non-mathematical appear to have their revenge, as the perils of over-reliance on complex symbolic notation and arcane formulae are relentlessly exposed.

In fact, developments or fashions in other academic disciplines and also in the general culture contributed at least as much to a willingness to engage in absurd risks and to provide and accept valuations of complex and inherently unfathomable securities. The general cultural developments are sometimes termed post-modernism, which involves the replacement of reason by intuition, feeling, and allusion.

But post-modernism has itself been generated by technology, with which it has a deeply ambiguous relationship. In contrast to a steam engine or an old-fashioned automobile, whose operations were easily comprehensible, modern automobiles or airplanes are so complicated that their operators have no idea how the technology they are using actually works. The Internet has created a world in which strict logic is less important than the juxtaposition of striking images.

Post-modernism moves away from the rational culture of the so-called “modern era.” Many people are finding more analogies with medieval life, in which humans were surrounded by processes that they found difficult to comprehend. As a result, they thought they lived in a world populated by demons and mysterious forces.

The recent era of global finance – perhaps we should speak of it as being past? – differed from the financial surge of a century ago. Its cultural manifestations also appeared to be novel. It was playful, allusive, and edgy – in short, post-modern. It treated tradition and history not as a constraint, but as a source of ironic reference.

At the era’s height, major financial players built vastly expensive collections of highly abstract modern art. A post-modern neglect or disdain for reality generated the sense that the whole world was constantly shifting and malleable, and might be as transient and meaningless as stock quotations.

An alliance was formed between financial experts who thought they were selling truly innovative ideas, a political elite that endorsed the philosophy of “regulation lite,” and a cultural climate that pushed experimentation and the rejection of traditional values. The result was that every sort of value – including financial values – came to be seen as arbitrary and fundamentally absurd.

When incomprehension no longer produces new heights of prosperity, but rather economic collapse and failure, it is not surprising that it turns to anger. Finding out who is to blame becomes more and more like the late medieval and early modern search for witches: a way of making sense of a disorderly and hostile universe.

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