Sunday, April 19, 2009

Minksy Meltdown

On Thursday, I was at the Hyman P. Minsky conference.  Like most conferences it had its ups and downs, which I won't bore you with.  It did however have one moment unusual for such a gathering of policy makers and academics -- the panel titled Assessment of Fed/Treasury Response To Crisis was remarkably blunt, especially given the several Fed presidents and assorted other government functionaries in attendance.  Unusual because these guys basically ripped the Fed/Treasury (remember when these weren't the same thing?) a new asshole. 

William Black (author of The Best Way to Rob a Bank is to Own One) spoke first about how government interventions similar to the current one create a perfect context for the white-collar crime know to criminologist as "control fraud".  I had actually read something by Black before, so I had an idea what he might say; the surprise was that everyone else on the panel agreed.  That doesn't mean everyone else at the conference, and in fact, some woman who arrived halfway through asked me after the presentation whether I though this was what most economists think, which had me chuckling.  I informed her that these guys were pretty far to the fringe, despite being correct (or perhaps because of it -- it is interesting to note that none of the panelists were economists, who seem to cultivate a willful ignorance of the incentive structure of actual institutions).  But it was gratifying not only to see five panelists saying essentially the same thing, but to see Dennis Lockhart, president of the Atlanta Fed, taking notes.

At the same time, I get frustrated by things like this.  Of course we just suffered the bursting of a giant corrupt Ponzi scheme.  You have to be blind not to understand this by now.

But that is not very interesting. 

Panics, bubbles, and Ponzi schemes have been around in various guises since people started handling money.  It is impossible that this is our last one.  The feeling that we have witnessed some rare and historic event is due entirely to quantitative considerations, and very short memories.

It's not even very interesting to try to understand the direct mechanisms that led to this bubble.  They too involve the same ingredients as ever.  Human greed being a constant, only a certain level of complexity, opacity, and surplus capital is required to catalyze a crowd.  Some day Google will formulate an information theoretic version of this law, but until then we can have faith that monkeys with the right incentives will always form crowds and fuel bubbles.

No, I no longer find either the moral outrage of the first revelation, or the structuralist dynamics of the second that fruitful*.  What I find more interesting these days is something deeper and more ... philosophical ... almost.  There will always be scammers and schemers and fine sounding charlatans, and despite the immorality of it all they will always find a way to take our money.  But why is it that we give it to them?  Why is it that after abundant evidence, we still fall prey to the same scams?  And I don't mean simply financial pyramid schemes.  I'm really talking about something much deeper here. 

It is the same question that makes fascism so interesting.  You can say that Hitler enslaved or simply fooled the Germans, or you can say that it was a predictable outcome of the economic circumstances of WWI and the Great Depression.  But none of these explanations are convincing.  Somehow we have to explain why, as Spinoza put it, people fight for their slavery as if it were their freedom.  Why do we again and again follow the same destructive incentives. 

Essentially, we have to explain power, the force that makes all of these mechanisms possible, the condition of possibility of enslavement, as it were.  I don't think we've gone very far towards this, towards understanding why so many people submit so often to such awful conditions.  Power operates alike in the strictest totalitarianism and the most open democracy.  It is not explained by the threat of physical violence or the promise of untold riches.  We know almost nothing about it.

* This is actually an exaggeration; thinking about the phase transitions that occur when a crowd is catalyzed is still a useful idea I think.

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