April 3, 2009

An Alternative View of the Puppetmasters

David Brooks says it wasn't so much greed as stupidity:

Jerry Z. Muller wrote an indispensable version of the stupidity narrative in an essay called “Our Epistemological Depression” in The American magazine. What’s new about this crisis, he writes, is the central role of “opacity and pseudo-objectivity.” Banks got too big to manage. Instruments got too complex to understand. Too many people were good at math but ignorant of history.

The greed narrative leads to the conclusion that government should aggressively restructure the financial sector. The stupidity narrative is suspicious of that sort of radicalism. We’d just be trading the hubris of Wall Street for the hubris of Washington. The stupidity narrative suggests we should preserve the essential market structures, but make them more transparent, straightforward and comprehensible. Instead of rushing off to nationalize the banks, we should nurture and recapitalize what’s left of functioning markets.

Both schools agree on one thing, however. Both believe that banks are too big. Both narratives suggest we should return to the day when banks were focused institutions — when savings banks, insurance companies, brokerages and investment banks lived separate lives.

We can agree on that reform. Still, one has to choose a guiding theory. To my mind, we didn’t get into this crisis because inbred oligarchs grabbed power. We got into it because arrogant traders around the world were playing a high-stakes game they didn’t understand.
I don't think anyone is arguing for permanent nationalization of the banks. Sweden, for example, did it only as a temporary transition out of crisis. Regardless, it does seem that a substantial amount of willful blindness was involved here. And what made that possible was the promise of great wealth. Kenneth Goodpaster describes this classic phenomenon he calls "teleopathy" as the unbalanced pursuit of purpose in his book Conscience and Corporate Culture. It comprises three elements:
1. Fixation or singleness of purpose under stress
2. Rationalization
3. Detachment
So Brooks is right that part of the problem was a kind of stupidity or lack of awareness. But a root cause of that blindness was also an attitude of moral detachment continually reinforced by the professional culture--and indeed myriad daily deliberate choices of its members in high finance to look the other way when their consciences should have been ringing the ethical alarm bells. Unfortunately, years of reinforced teleopathy must have reduced those bells to little more than a faint whisper in many an ear.

Interestingly, one can detect a slight feeling of discomfort in the young interviewer asking Jim Cramer for advice in the damning segments recently aired by Jon Stewart. Cramer seems to sense it a little as he says deferentially that he would never say such things on television. So he seems to be more desensitized than the rather "green" interviewer seeking council, which would make sense since Cramer is much older and thus more fully molded by the teleopathic environment he was evidently weened on during his years running a hedge fund.

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