I like the Financial Times (FT) for two main reasons: it gives me all I need to know that day in about seven pages every morning, and the fact that its ‘sound.’ By ‘sound’ I mean that, unlike the Murdoch press, I can rely on the FT to tell me the truth since consistently lying to the global investor class is a losing business model. But one should remember that for the FT, as it is for the rest of us, it’s still the truth as they see it.
A week or so ago the FT published a piece that asked why, if social democracies are so nice, their crime fiction is so dark? It’s a fair point, and anyone sitting through the middle section of ‘The Girl With the Dragon Tattoo’ has probably asked the same question. I didn’t read the FT’s answer, but my own answer comes from being in Iceland last week; a trip that gave me an insight into intellectual capture that I didn’t really appreciate before: that some truths are harder to shake than others.
While in Reykjavik I asked the locals what they thought was the biggest problem facing Iceland post-bubble. Interestingly, they didn’t say ‘the banks,’ or even ‘the debt’ – they said ‘the consensus.’ That is, being a consensus democracy, like most Scandinavian social democracies, its really hard to talk openly about what happened. The consensus is what makes equalitarian redistribution possible: we can all agree without debating it. But it also limits the ability to question the foundations of the system itself. In such an environment post-crisis discussions become ‘passive-aggressive.’ Like an old couple that should have divorced years ago, they displace the event itself and focus instead on anything else while personalizing everything. In Iceland’s case this means hunting down ‘the greedy few’ rather than questioning the system as a whole: a system that allowed the banks to grow to, at their height, 1000 percent of GDP. To do so would be to question “the consensus.” That is, the truth as they saw it.
I mention this because while political capture gets a lot of the post-crisis press, rightly– with my favorite recent slip being Spencer Bachus (R-Al) cracker that “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks”– it’s intellectual capture that, in my opinion, really does the damage (hence my last blog piece on Cowboys and Indians). Indeed, once you start to look for this, you begin to see its effects everywhere.
For example, my reliably ‘sound’ FT last Wednesday had a column by Alan Greenspan that wrote the crisis out of the history books in a most interesting way. Rather than deal with the crisis as it happened, or even address what it cost, Greenspan dealt with the crisis on a purely rhetorical level.
I mean rhetorical in the sense that Albert Hirschman identified twenty years ago in his fabulous book The Rhetoric of Reaction. (Really, if you haven’t read it, read it now – it’s like a Dan Brown crypex for crisis-newspeak). Hirschman pointed out that conservative arguments come in three distinct theses. First is the “Perversity thesis” where any well meaning reform produces its opposite outcome: ‘welfare makes you poor’ – that sort of thing. The second is the “Jeopardy thesis” where reforms put at risk more than they can ever deliver– the fear of extending the suffrage is typical. Third is the “Futility thesis” where reforms are simply pointless – fill in any and all opposition to global warming.
Greenspan begins with a few vignettes concerning Ford’s inability to get a credit rating on an ABS and how the banks will suffer if their ATM card fees are regulated, but he soon hits his stride. I gave him a “Hirschman Scorecard” of four perversities, three jeopardies, and two futilities in one column, which is the rhetorical equivalent of carpet-bombing the opposition. These ranged from bemoaning how “consequences cannot be readily anticipated” (Jeopardy), to noting how prop-trading rules will force operations abroad (Futility), and hand waving about complexity regarding “undesirable repercussions that might happen” (Perversity).
The reactions to the piece in the comments section were hearteningly harsh and the published letters of response struck the same tone (including one by me that prompted this column). No one is buying it. Good.
So is this evidence of soundness of the FT? Has the great veil of Greenspanish obscurantism and Ayn Randian rhetoric finally fallen – even at the bastion of ‘sound’ financial analysis?
That depends on the truth as you see it…
The next day the Lex section of the FT, normally the ‘go to guys’ for very insightful ‘below the radar analysis,’ while dismissive of the piece, quoted approvingly from the final section of Greenspan’s missive:
Noting that, “his warning…is distorted by the pro-market ideology that blinded him,” Lex notes that, “the former chairman…is on more solid ground when he praises the contribution of finance to economic growth, ” going on to recycle Greenspan’s argument that as countries get richer their share of banking as a percentage of GDP increases because more trade leads to more finance, and reciprocally, more finance leads to more trade.
This circularity of the logic is important because it lies at the heart of the standard argument concerning the contribution of complex finance/large financial sectors to growth. As they say in Scottish trial verdicts, the relationship is ‘not proven’ because of the difficulty of showing econometrically that complex finance/large financial sectors do not subtract from growth either. In short, the fact that causality runs both ways is not a virtue.
So if the complex stats don’t shed clarity on the issue how about some really simple ones? Here are some of the newspaper calculations (literally) from the Penn World Tables dataset.
The numbers below show average growth rates of total real GDP (as simple a measure as you can get) in two periods. Period one with capital controls and/or restricted financialization as the norm (1955-1975) and period two with no controls and heavy financialization (1985-2005) across the four most finance dependent economies: the US, the UK, Ireland and Iceland.
Period one (1955-1975) Period Two (1985-2005)
USA – 2.16 percent USA – 1.96 percent
UK – 2 percent UK –2.4 percent
Ireland – 3.1 percent Ireland – 4.99 percent
Iceland – 3.67 percent Iceland –2.35 percent
So what can we learn from this?
That the Scottish verdict is still the correct one: not proven. The US and Iceland seem to have had less growth the more financialized that they became while the UK and Ireland gained. But even the gainers must factor against this the costs of the resultant bust, which are for the smaller countries particularly painful (at 30 and 45 percent of GDP for Iceland and Ireland respectively). Add in the fact that in their former periods there were zero financial crises in these countries (at least up until 1972/3) and the evidence, such as it is, points in the other direction.
Twenty-five years ago the philosopher Hilary Putnam pointed out that conceptual absolutism – the belief in an Archimedean point of truth – was as unsustainable as complete conceptual relativism – where anything goes. Broadly, if anything can count as the truth, then something invariably does, until something else replaces it.
Some truths, it seems, are particularly hard to shake, even after the crisis. The idea that finance must somehow, by circular logic or not, add to growth, is deeply entrenched. But like the Icelandic consensus, it needs to be challenged because it lies at the heart of all reform attempts. These ‘consensus truths’ are the most dangerous of all because we take them for granted and in repeating them we make them true. This is why intellectual capture is the hardest problem to deal with in finance, because unlike political capture, it has no regulatory solution.