Thursday, 18 September 2008

The Cacophony

The closer you are the more worried you are.

The analysing is almost as frantic as the markets, but there is clearly no agreement even about the basics. Neither on causes, nor on consequences.

The regulation-optimists. A.k.a. the ‘ultimate-denial-people’. The more political function you have, the more likely you are to be here.

The regulation-optimists see the current crisis as primarily caused by lack of adequate regulation. Thus, the solution is to have more of it. As if ‘regulation’ was a type of custard of which you pour more if you want. There is little consensus in the substantive discussion about the details of what is being proposed. The only recurring theme is that it should have been less easy to lend. Really? So all the financial innovations that would allow structuring risk should be out of the window? Is the argument really against sophistication? Oh, no, comes the answer, it should have been less easy to lend to risky people. I see, so your argument is like reacting to a mass highway accident by turning rusty old cars into horse-drawn carriages, while keeping all the Ferraris.

The ‘this will pass’ semi-optimists. The more academic your are, the more likely your argument goes in this direction.

The study of economic history provides a comfortable backdrop against which what is happening now is not necessarily that unique. You are probably using the phrase “yes, that is correct, but history would suggest that…”. And, of course, you can also point to the - historical - fact that market people and politicians always overreact in times of crisis, always ignoring the lessons of the past. It is very difficult to argue against you, for (a) the facts of the past are on your side, and (b) people did try to claim at every crisis in history that their one was special.

The return-to-decoupling semi-pessimists. If you have a strong exposure in China or the Gulf, the idea probably has already crossed you mind. (Russia, with perfect timing, ruled itself out of the oh-no-we-are-immune club.)

The concept of decoupling, very badly defined most of the way, was rather fashionable up until around a year ago. It started with the revival of the ‘global regions’ notion, and ended up using macroeconomic variable clustering. After the fifteen-weeks of fame, however, the idea-bubble had burst, being pointed out that intra-regional trade patterns in East Asia were just catching up to the global level of integration, and macroeconomic convergence is actually the opposite of decoupling. Now, the idea is coming back again. Although the arguments tend to be mostly emotional (“please, please, let something stay safe, I will be good, I promise”), at least we will have the ultimate test of the hypothesis.

The armageddon type. The closer you are to action, on the markets, or in media, or in policy, the more likely you are to be in this category. Disturbingly, that is true within the armageddon group itself: the most worried people are the ones who really see what is happening.

Soldiers tell you that people who get hit by a bullet will most often go into a state of disbelief. Although you have seen this happen to others, you just do not believe that it is happening to YOU. This denial seems to be the only general characteristic of the reactions now. People seem to ‘get’ what happened so far, but the improbable nature of these events make forecasting the consequences emotionally difficult. However, those who are closely involved with sorting out the crisis, and in that are making up new rules, and trying to invent new policy tools, have no choice but to come to terms with the depth and width of the trouble. They are talking about actual banks that will come next, rather than the generalities of financial contagion. They are discussing the collapse of actual countries rather than pondering if the ‘world economy could turn into recession’. Very worrying.

To sum up, imagine that you are rushed to the hospital, you don’t feel well, and a bunch of doctors come up to you. The first one says, oh, no problem, a bit too much running around with wet hair, perhaps; we will sort you out now, and then you just have to make sure you put a hat on from now on. The second one ponders that, well, you do have a nasty flu, but in the past you survived all of them, no? Nothing to be worried about. The third one announces that although, for some odd sounding reason, they will have to chop a leg and and arm off, the good news is that you will have two limbs left. And then comes the fourth, who turns out to be a specialist on your rare virus, examines you thoroughly, and then she comments on how interesting tomorrow’s dissection will be.


  1. The "Japan is a a different place" argument in a NYT article.

  2. Balazs Szendroi, good friend of mine, commented on this in an email (copied here with permission):

    "This comes across as a 'market fascist' position: as if regulation was always bad, politicians were always populists, and thus as if that would be all to it. The finance experts agree now, don't they, that mis-regulation and under-regulation has been a problem, you'd agree with that much, no?"

    My counter argument is this. The debate about regulation is similar to a discussion on how to reduce highway traffic accidents: control the a universal maximum speed, or categorise vehicles into subgroups and have selective speed controls, or force some vehicles off the highway. Hence the rusty old car versus Ferrari metaphor. Maybe, instead, the alternative would be to switch transport to railways, that is, maybe the framework in which the global finance regulation needs is debated should be questioned as well.

  3. On Russia's non-decoupling: an other brilliant NYT article.