A Word of Advice About the Markets

Everybody is preoccupied with yesterday’s market debacle, so allow me a few comments.

I am not going to offer words of wisdom about the markets, but about emotion. Specifically, about the way savvy market participants use emotion as a guide to action.

On Wall Street the conventional wisdom says that you should act contrary to the prevailing market sentiment. If everyone is optimistic, you should sell. If everyone is pessimistic you should buy.

Extremes of emotion tell the savvy investor to run against the crowd.

Of course, if everyone is following this rule, then the appearance of too much pessimism will turn a lot of people too optimistic too soon.

It’s much easier to state this rule than to follow it.

Inevitably, after a major market wipeout, sage commentators man the media battlements and advise everyone to stay calm.

Don’t panic, Dave Kansas wrote this morning in the Wall Street Journal. When everyone is afraid, you need to keep your head and act rationally. Kansas concludes that the economic situation is not as bad as a lot of people think it is, so you should look for bargains.

In his words: “So, as the markets crater around you, keep a cool head and look for opportunities that make sense. As Warren Buffett says: ‘Be fearful when others are greedy, and be greedy when others are fearful.’ No shortage of fear out there on Thursday.”

As always, this is not as easy as it looks. Kansas, a wise man, uses fear and panic interchangeably, as though they are the same thing. As it happens they are not.

But, how can you tell the difference?

Baron Rothschild once said that you should buy when there’s blood in the streets. Was there blood in the streets yesterday?

The image of blood in the streets is more vivid than a spike in the VIX. The latter index measures market fear.

Before even trying to get an accurate read of market sentiment, let’s acknowledge that there are times when fear is the rational response. It may be that the people who were selling stocks yesterday were acting rationally. It may also be that the people who are holding on to their stocks because they hope that things will turn around are being irrational.

Fear is not the same thing as panic. If you are walking down a dark street and start to feel fear, you are probably reacting to an unperceived danger. If your fear does not become panic you will take immediate precautions to reduce the danger.

If you panic you will not be able to address the danger. You might freeze; you might run screaming into the arms of a predator who was stalking you.

Panic makes people act irrationally. Fear can coexist with reason.

As for measuring the fear or panic of market participants, we need to keep in mind that there are not very many individual investors in the market these days. The stock market long since become the playground of large institutional investors and hedge funds.

Better yet, a goodly part of the trading is run by computer programs that, dare I say, feel neither fear nor panic nor greed.

Worse yet is the effect of over-leveraging. How much of what appeared to be panic selling represented forced selling by people who were receiving receive margin calls? How much of the sell-off was panic and how much of it was deleveraging performed by computerized trading programs?

In a market panic, everyone sells everything, indiscriminately. In a bout of deleveraging they do the same thing.

Also, consider this. In today’s America, and not just in America, large segments of our population have chosen to regulate their emotions with medication.

Thanks to SSRIs,  Americans have been drugged into an irrational optimism.

When you are reading today’s reactions to yesterday’s market collapse, are you reading optimistic reports about what can be done to fix things or are you reading pessimistic reports about why we can never fix things.

Only the latter would show true panic.

If you are optimistic, how much of your emotion reflects your assessment of economic reality and how much of it has been biochemically enhanced?

Today, people are talking about how the Federal Reserve is going to come riding to the rescue with another bout of quantitative easing, and about how we can solve our problems by spending more money that we don’t have.

In a market panic, everyone tells you to run for cover. Today, people like Dave Kansas are telling you to look for bargains.

In a market panic, people swear never again to buy any stock ever again. When people are not in panic mode they are looking to buy the dips.

For what’s it worth, people who are afraid are probably right to be afraid. As long as we have not abandoned all hope, we have probably not yet reached panic mode.

"Heading Towards the Economic Abyss"

What if the stock market declined and nobody noticed. For the past five weeks the market averages have been declining. The strange part is that no one seems to be very concerned. Link here.

If the market were crashing, everyone would notice. We respond to dramatic events, like hemorrhages, but try to ignore slow bleeds, as though they will stop on their own.

Many people have been lulled back into the stock markets. They are fully invested, so they have adopted the buy, hold, and pray attitude.

Of course, the real basis for contrarian investment psychology is that once everyone is fully invested there is no new cash to keep buying stocks.

Besides, investors know that stocks are the only way to earn a return on their money. They have also become convinced that, if things take a serious turn for the worse the Federal Reserve will come dashing to the rescue with another round of quantitative easing.

Besides, where else are they going to put their money?

They are not going to put it into real estate. Speaking of slow bleeds, the housing market has fallen for just about every month for nearly five years. The dreaded double dip seems to be upon us. We have just learned that the recent decline in the price of homes surpasses the one suffered during the Great Depression.

The nation’s economic health is basically on life support. As James Grant suggested, and as I posted a while back, the only question is whether the collapse is going to be fast and ugly or slow and ugly. Link here.

While we all agree that the path to a solution lies in drastic cuts to the federal budget, to say nothing of the state and city, budgets, let’s not fool ourselves into thinking that this “fast and ugly” approach will not be painful.

As of now the stock market decline has been slow and ugly. Given the Fed’s past behavior there is no guarantee that it will become fast and ugly, but, once it does, it will be too late for many of us.

How bad is it? Writing in the London Telegraph Nile Gardiner entitles recent post:  “After 29 months of the most left-wing presidency in US history, the American superpower is heading towards the economic abyss.” Link here.

Gardiner offers a cogent analysis of the situation: “Years of profligate spending, massive bailouts and useless stimulus measures have made America poorer, not richer, and threaten the long-term economic foundations of this great country. President Obama’s big government experiment has been a dangerous failure, only further proof that the deadening hand of federal intervention is the last thing America needs at this time. The United States needs more economic freedom, less government regulation and spending, and lower taxes if it is to create jobs, wealth and prosperity, a message that seems to have been lost on the Obama presidency as it drives the United States towards the financial abyss.”

And then there is Marc Faber, market prognosticator, proprietor of the Gloom Doom and Boom report, who explains: “No I don’t think [Obama has his priorities straight]... because the priority would be to essentially make the US competitive, and by pursuing expansionary fiscal policies that enlarge the government, you atrophied the private sector. In other words, the private sector is hurt by too much government involvement.

“Like my friend... says, we have to pay more and more tax for government officials to harass us more and more and implement more and more regulation. And that of course is not a way to create prosperity. If you have a large corporation or a corporation, you are more likely to hire people outside the US than in the US.” Link here.

Given his propensity for gloomy predictions, Faber also explains that he believes Obama will be re-elected.

He reasons that if you put a majority of people on the government dole, they are not likely to vote to reduce their stipends.

In Faber’s words: “I think [Obama] will be reelected because we have some kind of a tyranny of the masses. You have essentially more people getting handouts than large tax payers. And so they are huge voting block. Then you have the unions, also large voting block. And then you have the government officials. They don’t want to have cutbacks in government and be fired. They essentially are paid more than the private sector. So again a large voting block.”

Obama’s legacy might involve a cultural transformation pitting the nation’s haves against the have-nots? In place of one America, Obama seems to want to produce two Americas where the gap between rich and poor becomes increasingly vast, and increasingly likely to produce conflict.

Does this make Obama a demagogue? Of course it does. By appealing to the baser human emotions, by making most of the country depend on the government, by channeling that nation’s anger against the wealthy, he is a classic demagogue.

Unfortunately, we use the word “demagogic” so often now that it has been drained of its meaning. Yet, no one has failed to notice that the Democratic party and its leader are demagoguing the Ryan budget, trying to make the Republicans into the party of privilege and the Democrats into the party of the masses.

The greater the chasm between rich and poor, the more the nation will be divided against itself.

If the Democrats can convince the elderly, many of whom are not poor, that rich Republicans want to take their Medicare and Social Security away, then they will win.

The classical example of the outcome of liberal policies is of course New York City, where 40,000 people pay half the taxes. And where the middle class is being driven into extinction.

After 29 months of Obama the national mood has deteriorated along with the nation's finances.

The Daily Beast has this to say when introducing a new poll coducted by Doug Schoen: “Gas and grocery prices are soaring, the housing market is crashing to new lows, and yet another dismal jobs report has confirmed a stubbornly high unemployment rate. Could the anger fueling the Arab Spring soon bring club-wielding protesters to America?

“According to an exclusive poll by Newsweek and The Daily Beast, reality is beginning to break down Americans' normally optimistic attitude. Three-quarters of our respondents think the country is on the wrong track. A majority say the anxiety wrought by this recession has caused relationship problems and sleep deficiency. Two-thirds even report being angry at God.”

Now that the decorum of Tea Party rallies has been replaced by the thuggery of pro-union rallies, it is clear that an irrational, virulent form of anger is on the march in America.

We have not gotten to the level of club-wielding protesters, but we are probably not that far away.

Let’s not underestimate how national leadership has been stoking this new and nasty outrage.

We have been watching the Middle East descend into chaos, engulfed by violent protests. The administration seems willing to validate these tactics, seeing them as an instance of the masses rising up against their oppressors.

It has no idea who the protesters and has no idea of how to manage the ensuing chaos.

In so doing, the Obama administration has been telling the world, and has been telling its constituents that violent protest are a valid and acceptable form of political action.

Good bye, civility. Welcome, days of rage.

Have a nice day!

Trendspotting in the Art World

I’m not sure what we should make of it, but it bears mention: the center of gravity of the world art market seems to have set down in China.

Roger Denson is correct to point it out. Link here.

Why would it be historically significant? Perhaps because it offers a snapshot of one moment in the competition between civilizations. (Note, I did not say clash of civilizations.)

Civilizations compete. So do nations and empires. They compete to see who can provide the best life for their citizens and subjects.

A good life does not merely mean a life filled with riches. A good life involves providing psychological capital, pride and confidence to each and all. True happiness comes from the pride we take in our achievements, but that is not merely individual achievements. The nation’s or the civilization’s achievements contribute mightily to forming and maintaining a positive identity.

Civilizations also compete to establish dominance and influence in world politics and world markets. They compete at war and they compete in business. The latter was famously called by William James: the moral equivalent of war.

Military victory grants the winners a boost of pride and confidence, to say nothing of the other advantages that accrue.

Influence is easy to understand. Every American citizen gets one vote in the presidential election. Every citizen of Bolivia, to take a random example, gets one vote in the election for the president of Bolivia.

One might argue, with no prejudice to the people of Bolivia, that an American citizen’s vote counts for more, in terms of influencing the course of history and the direction of events in the world, than does the vote of a citizen of Bolivia.


Not all votes are created equal.

Of course, the art market does not create massive wealth and does not contribute to military or economic victory. Yet, if we limit ourselves to the market for fine art, it is certainly a very small market-- miniscule when compared to the bond market or the Forex-- but its higher echelons are inhabited by some very savvy players.

People who bid and collect fine art tend to be very, very smart. They tend to be very sophisticated investors. No one spends $20,000,000 on a colored piece of canvas if he does not see it as an investment.

A great work of art is more than a pretty picture.

The people who determine the direction of the art market are not aesthetes. They are patrons of he arts, modern day Medici, who pay very high prices for objects that they believe, correctly, contain intrinsic value.

Great art is a store of value, of value that transcends the guarantees offered by central banks.

For some time now people have noticed that great art is not produced haphazardly and at random. Great artists come in groups. At a moment in time a group of great artists seemed to emerge together in Italy during the High Gothic period or in France during the Impressionist period.

Hegel examined the phenomenon and concluded that the movement of the art world’s center of gravity corresponded to the movement of the World Spirit.

From pharaonic Egypt to the Golden Age of Athens to the Roman Empire to the High Gothic period in medieval Europe, to the Renaissance, up to and including the abstract expressionist and pop and conceptual art in New York City after World War II... the World Spirit has been on the move.

There are other ways to see this. A nation wins a war, forms an Empire, collects wealth and power... and people look up to it. They want to emulate its example. They adopt its cultural habits, among which is its aesthetic.

Empires seem especially apt to produce great art. Perhaps only an Empire can afford to support great artists, or perhaps it takes an Emperor to believe that his claim to authority rests in some part on his ability to make his world the center of art historical gravity. Or perhaps an artist needs to be at the center of economic and political action to be inspired to his true greatness.

High art is not the province of the masses. We no longer have princes and princesses, but we have hedge fund tycoons, people who have built financial empires and who want to influence the culture's value system by placing value on art.

But, what value system is at work when you see a tiger shark in a vat of formaldehyde, or a colorful collection of encased vacuum cleaners, or a picture that looks exactly like the design of a soup can?

And what is the value system when art denounces the collector as a mindless cog in the capitalist machine.

If as James Goodwin and Roger Denson suggest, great art gives people a feeling of pride in their culture and their nation, what are we to make of these modern works that make a mockery of our civilization?

These artists do not expand the great tradition of Western art, because they do not respect it. They do not respect collectors, because the collectors are buying the stuff as though it had some kind of transcendent aesthetic value.

After all, anyone who stares in awe at a household object because it has been exhibited in a museum is more concerned with looking like a member of the in-crowd than  in gaining any aesthetic satisfaction from the viewing.

I am sure that this will make me sound like the last of the Philistines, but there is a significant aesthetic difference between a picture of a soup can and a Vermeer.

And yet, I do understand that these great modern art works are not supposed to be about the object anyway. They want to elicit a cultural critique, a subversive gesture that would undermine, not build on, national pride.

And that is the strange part. If Goodwin and Denson are correct to say that the current Renaissance of Chinese art, coupled with the ascendance of the Chinese art market, have been produced by people who are taking increasing pride in their country, their culture, and their civilization, what does it say about America when we see that artists who are lauded beyond reason are telling us that we should not take pride in American culture or civilization?

What does it say when the wealthiest and most successful among us are feeding this valueless system.

One finds it difficult to imagine how our nation is going to compete effectively against China or any other civilization if we repudiate our past and only find things to criticize in our present.

Here is Denson’s analysis of the potential fallout that might be about to hit the American art world: “In China's case, at least if we consider the top earning Chinese artists named here, the artists signify that the Western predilection for the new and trangressive art that has dominated the art market and art history for the last two centuries might face their eclipse by a culture still favoring artistic traditions. Could the shift in markets translate to more traditional contemporary Chinese artists--and possibly even more traditional Western artists, growing in esteem? That is, receiving more representation in museums, feature articles in trade publications, and internationally distributed monographs-in-translation--at the expense of the artists who represent what's left of an increasingly threadbare avant-garde? The challenge that Western curators face is how to assimilate artists who appear traditional in relationship to the Western post-postmodern-garde without falling back on eurocentric values that once marginalized non-Western art as ’ethnic,’ ‘regional‘ and ‘traditonal.’"

I have my own doubts about whether the past two centuries of Western art have been as transgressive as Denson believes. Still, it is worth noting that American and British art has become less and less representational, and that it no longer has anything that resembles an aesthetic.

Perhaps,  Manet was avant-garde at his time, but he certainly had an aesthetic, as did the other great artists of his period.

It may have been a different aesthetic, but it was intended to give the viewer an aesthetic experience.

Denson is right to see that the newer Chinese artists are going to become increasingly influential and that this is going to cause us to see art in a very different way.

Keep in mind, somewhere around the year 1900 someone did a survey of educated Parisian opinion. He asked which contemporary artists would be most admired a century hence. It wasn't Manet or Monet or Cezanne or Renoir.

The winner was: William-Adolphe Bouguereau.

Bloggers Anonymous

Is anonymity the enemy of free speech?

Can the marketplace of ideas continue to function when people can freely hide their identities?

Do people write anonymously on the internet because they want to slander and defame others with impunity?

Yesterday, Stanley Fish addressed some of these issues in a compelling column. He was writing about a book that offers a shrill attack on the internet. Entitled The Offensive Internet, the book argues that since the internet allows authors to hide their identities, it promoting an especially virulent form of assault, and thereby is ruining public discourse. Link here.

Stanley Fish sums up one part of the argument: ‘The practice of withholding the identity of the speaker is strategic, and one purpose of the strategy (this is the second problem with anonymity) is to avoid responsibility and accountability for what one is saying. Anonymity, Martha Nussbaum, a professor of law and philosophy at the University of Chicago observes, allows Internet bloggers ‘to create for themselves a shame-free zone in which they can inflict shame on others.’ The power of the bloggers, she continues, ‘depends on their ability to insulate their Internet selves from responsibility in the real world, while ensuring real-world consequences‘ for those they injure.”

Surely, this is alarmist hyperbole. Just as surely, it is an exaggeration, paying lip service to the marketplace of ideas while attacking, in the most uncivil terms, the internet itself.

As Fish adds: “In the course of the volume the Internet is characterized as a cesspool, a porn store, a form of pinkeye, a raunchy fraternity, a graffiti–filled bathroom wall, a haven for sociopaths, and the breeder of online mobs who are no better than ‘masked Klan members‘ in their determination to ‘interfere with victims’ basic rights.’"

While no one would grant the internet moral agency, this level of exaggeration suggests that the authors are not just exercised over unprotected slander, but that they have a larger agenda. It appears that they are making the case for regulatory control of the blogosphere because they feel that it brings out the worst in human nature. Better yet, they seem to believe that the worst is the truth of human nature. They have so little faith in freedom or in human judgment that they see nothing but calamity coming from the free and open expression of ideas.

Regardless of the high tech aspect of this argument, its proponents are saying that human beings are too evil for freedom.

If the authors really wanted to rectify the fact that our culture is awash in incivility, they should have started by toning down their own overheated rhetoric and by practicing civility themselves.

I would not deny that some people hide behind anonymity to slander, libel, and defame. None of these is constitutionally protected free speech. All can be prosecuted or litigated.

Were it simply the question of passing a law that requires internet providers to reveal the identities, if known, of those who commit such actions, most of us would be in favor.

Beyond that small minority, some people blog anonymously because they are shy and discreet or because they want to protect their reputations or their lives.

Several prominent psych bloggers write anonymously for professional reasons. Among them are Robin of Berkeley, Shrinkwrapped, and F*ck Feelings.

Others might fear the consequences of saying things that others might find blasphemous. Cartoonist Molly Norris stepped forth in her own name to sponsor a contest about drawing a cartoon of Mohammed.

For her pains, the FBI insisted that she go into witness protection and change her name.

A whistleblower might be wiser to blog about corporate dereliction under the guise of anonymity. An assistant professor who is up for tenure might think it wise to express his politically incorrect opinions anonymously.

Anonymity is a classical way of avoiding censorship. In a culture where people are quick to take offense, and where differences of opinion are often denounced as hate speech, why would it not be reasonable for some people to blog anonymously?

Stanley Fish is correct to say that the identity of the author of a blog post, or of any verbal expression, constitutes part of the message.

If you receive a stock tip you would probably want know whether it was coming from Warren Buffett or Stanley Fish.

But, we also know that a person who chooses to mask his identity also loses some of his credibility.

If it were simply a question of anonymous shaming, that would be one thing. But the intellectuals who wrote this book do not limit themselves to shaming. They also want to regulate what they call the intentional distribution of disinformation.

As Fish presents the argument: “Rather then producing truth, the free and open marketplace of the Internet ‘will lead many people to accept damaging and destructive falsehoods,’ and unless there is ‘some kind of chilling effect on false statements,’ the ‘proper functioning of democracy itself‘ may be endangered.”

Of course, there is a difference between defamatory speech and falsehoods. And then there is the problem of knowing when falsehood is being purveyed intentionally. When we start talking about threats to democracy we are not talking about a teenager calling another teenager a slut.

But then, who might it be who is purveying destructive falsehoods that are threatening democracy itself? And who is going to decide what should or should not be allowed to be reported?

Do you imagine that these writers believe that the New York Times and MSNBC distort the news? From their leftist perspective these publications present the unvarnished truth. Their enemy is Fox News. It is usually what leftists are referring to, without naming it, when they talk about puveyors of lies and falsehoods.

And aren’t these great intellectuals most lathered up over the fact that they have lost their monopoly control of what information the public can access?

Aren’t they just pretending to get lathered up over internet slander because they are looking for a toehold to open the door to censorship and to restore their own power over the marketplace of ideas?

Do We Trust Ben Bernanke?

What if there was a crisis and you didn’t get what was happening? As Americans have been trying to get a grip on the continuing financial crisis many have discovered that they are poorly equipped to understand what is happening.

Had you been reading the facial expressions of the principals in late 2008 you probably figured out that we were in serious trouble. But then, once anyone tried to explain what was going on, most of our minds went blank. The information did not register.

Feeling lost, we were being attacked by a special kind of anxiety. We knew that we did not know. We hoped and prayed that the people in charge did know something about what was going on and did know how to fix it.

More anguishing still was the fact that we didn’t even know if they were getting it right. As of today, we still don’t know.

Many of us went to college and bought the idea that we should always exercise our independent judgment. We were not going to be led around by old authority figures; we would thrill to our own mistakes.

But, there comes a time when we recognize, as many people are seeing now, that if your studies have not given you the intellectual tools required to analyze the state of the financial markets, then, talking about independence and autonomy is just blowing smoke.

The less you understand the more you have to rely on the expertise of the elites. You do not have a real choice.

Unfortunately, the people we call on to fix the system are the same people who got us into the mess in the first place. But now we have to trust them, because the system they built and drove into ground is so complicated that no one else understands what is going on. And no one else knows how to run it.

As I said, the country is not awash in confidence. If we are entering a new age of anxiety, this reliance on experts must rank high on the list of reasons why.

Sometimes we understand crises. We can picture them. It’s easy to picture the action of war or to watch swarms of illegal immigrants streaming across the Arizona border.

When a hurricane or an oil spill or a snowstorm or a flood attacks the nation we can sit back, turn on the 24 hour news channel, and find image after image of the calamity at hand.

If we can picture it, we get it.

But what happens when we don’t know how to picture it? What does it mean when a credit market freezes?  How many of us understand the interplay between the housing market, the mortgage market, the Federal Reserve, Fannie Mae, Freddie Mac and government regulatory bodies?

Even today, I would venture that most people could not define a Credit Default Swap and cannot explain to you what collateralized debt obligations are. How many of us believe that we could navigate the markets where these and other exotic instruments grow and metastasize?

If we don’t know what is really going on, how can we feel confident that we know which policies are right and which are wrong? Or which leader will do the best job of implementing the policies.

So, in the financial crisis, as rarely in the past, we feel like we are at the mercy of a governing intellectual elite. And this elite does not even come to us from the Humanities or the legal profession. This makes it much more difficult to ridicule them. They are mostly economists, and even investment bankers.

Most of us do not understand the financial world. Thus, we base our opinion on more obvious observations: bankers are making out like bandits in the crisis.  Does this make us more or less likely to trust them?

Many people have now figured out that the Obama White House is full of pinheaded intellectuals who do not know what they are doing. Most of them have never run a business or even met a payroll.

Fewer people are aware of the fact that the Chairman of the Federal Reserve is also an Ivy League intellectual, a Princeton professor who has no experience in the real world of business and banking but who has complete confidence in his ability to manage the crisis. Do you feel less or more anxious?

If you are looking for a silver lining in the current crisis, it’s this: more and more people who knew nothing about the financial system have started learning about it. They are fighting their own private wars against financial illiteracy.

It’s cool to be cultured. It’s cooler still to be a connoisseur of the arts. Yet, if all you know remains within the realm of the aesthetic you will find yourself disarmed when it comes to making major life decisions… about your own finances and your vote.

I can attest that people who would have gone to holiday parties to discuss culture and the arts, that is, the latest movies and plays, are now sitting around discussing the Fed’s latest round of quantitative easing.

When it comes to trying to get a handle on what it means for the Federal Reserve to adopt a policy of quantitative easing, many of us have regaled ourselves with a cartoon produced by the crowd over at Xtranormal.  Link here.

Admittedly, I am late to this party, but on the off chance that some of you might have missed it, this cartoon explains a great deal and provides more than a few good laughs.

David Rosenberg Looks toward 2011

Consider this to be something of a public service. One of my favorite economist/market strategists, David Rosenberg, of the Canadian firm, Gluskin Scheff has offered us some predictions for 2011. Link here.

After the list of Rosenberg's rather dire predictions, Business Insider shares some of Richard Bernstein's more positive views.

To my mind Rosenberg matters here because his views are so thoroughly out of line with the Wall Street consensus. For those who follow contrarian thinking, the increasing levels of Wall Street and investor optimism, or, at least, complacency, should be warning us of trouble ahead.

Can You Spend Your Way Out of Debt?

It’s has happened so often that it's becoming a cliché. A talk-show journalist, interviewing a Republican about budget issues, will always ask: But where will you cut?

You would think that these journalists are suffering from an advanced case of castration anxiety.

Not to be too Freudian about it, but many people understand the current financial crisis in terms of one or another narrative. We would do better if we also understand that narratives never tell the whole story.

Ethical principles, society’s core values, must count. More so now that the values we have been maintaining for the last few decades have now been proven to be unsustainable.

Take the narrative: Your child spends too much money and he calls on you to bail him out. If you say Yes, you are indulging his bad habits. If you say No, God knows what he might do to himself.

The good news is that every American has come to the belated realization that Ben Franklin was right about the value of hard work and thrift.

How did we lose touch with the old value system? Simply, the mental hygiene profession decided that hard work was self-destructive and that thrift was just a euphemism for repression.

It told us that happiness and good mental health depended on our ability to enjoy a life of leisure while spending our resources freely. By resources, the therapy culture meant your emotional and sexual resources.

Along with thrift, discipline became an obscenity. Thus, in the minds of television interviewers, fiscal discipline, to say nothing of the dread austerity, is simply going to immiserate the nation.

And this is not entirely wrong. Everyone knows that you cannot spend your way out of debt. You cannot keep borrowing on the chance that your credit line will hold up long enough for you to continue to keep making your payments.

And yet, going cold turkey on a spending addiction is not going to make you happy.

You may want to teach your child responsible behavior, but you would probably not cut him off completely and risk seeing him doing something drastic and irreparable.

Besides, if your child is profligate and intemperate in his spending habits, whose fault is it anyway? How many parents will rescue their children from their errant ways because they, the parents, feel responsible for not having taught them, the children, good behavior.

And how many of them will simply not be willing to risk what might happen if they say No. A child who cannot pay his debts might become homeless, might commit suicide, might rob a bank, might start dealing drugs, or might prostitute himself.

Call it tough love if you like, but a parent who gives in when faced with those possible outcomes is not being a moral sellout.

It’s a good thing to be against bailouts. From a moral perspective, they are clearly a step in the wrong direction. And yet, when it’s your child, and the alternatives are horrifying, which set of parents would simply say No, nothing… do your worst.

And yet, many parents do arrive at that point. After having their generosity abused repeatedly, they arrive at the last recourse… treat the profligate son as an adult and cut him off.

This will force him to learn responsibility the hard way. It will offer him a lesson in good behavior that he will long remember.

If he survives it, that is.

All of this to say that either our leaders will find moral virtue on their own or the markets will impose it on them.

We have lost track of the old virtues, of discipline and thrift, of earning your way and working for what is yours.

Our fiscal incontinence is hardly limited to the government. Household balance sheets are in a calamitous state, too.

This could not have happened if we had not, as a culture, decided that debt was not such a bad thing, because it could be redeemed by the joys of spending.

Express all your feelings, we were told, even if they are not really your feelings. More at home on stage than in the real world, therapists have been teaching people to emote on cue, to feel the feelings they are supposed to have, to feel the feelings that might be appropriate for the role they have adopted.

Just because you can throw yourself into a paroxysm of rage does not mean that the anger is really yours. If it has not arisen within the right context, then it is pure theatrical display, a form of emotional incontinence.

But once such displays become their own reason for being, once we all come to believe that expressing our feelings will produce some kind of emotional equilibrium and enhanced mental health, then we lose complete track of whether we can afford the expense.

By that I mean that we will not be trying to suit our emotions to the real world of our relationships. When our newfound willingness to let it all hang out seems to undermine our relationships we will double down, express ourselves more fulsomely, and turn ourselves into perfect drama queens.

Eventually we will be alone and isolated, self-absorbed and self-involved, having racked up a string of debts to all of the people we have offended and insulted. We will find ourselves surrounded by the rubble of the relationships we have destroyed and the pain we have inflicted on those who have cared for us.

Once you get to that point, the point where you have not just run out of money, but you have run out of other people’s money, you are going to have a very rude awakening.

How Do You Know If It's a Bubble?

A few weeks ago I felt compelled to respond to all of the talk that gold was in a bubble. Link here. In brief, I suggested that when everyone says it’s a bubble, it can’t be a bubble.

Yet, if you had a foolproof way to know when a market is in a bubble and when it is just going up, that is, when a rally is sustainable and when it is about to crash, you could become very rich indeed.

Thus the interest in Jonah Lehrer’s report about research into market bubble psychology conducted by Read Montague at the Baylor School of Medicine.

Montague and his colleagues have discovered how and why we get caught up in bubbles. They have gained new insight into how we fall prey to market exuberance and they have discovered a way to identify bubbles by testing the brain’s biochemistry. Link here.

I am not quite as optimistic as Montague when he suggests that the Fed can stop bubbles by buying a brain-scanner. But I can imagine a few hedge fund managers who are currently ordering brain scanners.

Montague's research shows that when you are actively participating in a market that is going up you will want to invest more and more of our money in it.

One might say that in those circumstances the rational and irrational portions of your brain are in synch or in harmony. Your rational mind sees profits and your irrational mind does not see any inordinate risk. So you decide to keep investing.

When a bubble starts forming, however, your rational mind will still be telling you to stay in the market. Your irrational mind, however, will be sending out warning signals.

This means that your rational mind will begin to come into conflict with the part of the mind that is telling you to get out. And its vaunted rationality will then work to prevent you from taking the kind of action that would protect you from the danger.

Your rational mind might be telling you that you are really, really smart, and that your run of good luck is not just a matter of luck but a function of your superior abilities as an investor.

If your rational mind is aware of the message that your irrational mind is trying to communicate, it might believe that it is in conflict with the forces of irrationality and they it must suppress or control them.

It may do so by labeling those fears irrational, and then dismissing them as the product of a childhood trauma.

I do not wish in any way to question the science behind the research. I would, however, be more cautious about using the terms rational and irrational.

Why should we think that the part of your mind that is attuned to reality and that is trying to warn you of danger ahead is irrational? True enough, its message does not seem to have originated in conscious thought, but it is certainly better tuned in to reality.

And I would question why we should call the part of the mind that ignores reality and tries to point you toward perdition should be honored by being called rational.

Therapists used to think that people suffering from anxiety and phobias were irrationally afraid. And they used to think that the rational mind needed to take control over the irrational part… because if patients were not afraid of anything real then they were re-enacting scenes of childhood terror. They needed to psychoanalyze their irrational anxiety.

The old theories used to see the mind in conflict between the rational side and the irrational side. Beginning with Freud therapists allied themselves with rational thought in its war against irrational impulses and thereby presented themselves as enlightened men and women of science.

But, what if this supposedly irrational side of your mind is telling you the truth. What if, when you start feeling a twinge of anxiety, your mind is alerting you to a danger that you are ignoring?

Call it irrational if you wish, but this part of the mind is simply in better touch with certain realities than is your conscious mind.

After all, Aaron Beck made an important observation when he said that phobics are usually afraid of things that represent real dangers. Being afraid of heights, spiders, crowds, blood, and enclosed spaces is perfectly rational, and perfectly adaptive. People who are unafraid of snakes and crocodiles probably have a shorter life span than those who are afraid.

The fact is, all of these phobia-inducing objects are objectively dangerous.

The phobic is not afraid of nothing; he is not repeating an unprocessed infantile fear. He is overly sensitive to a real danger, not delusionally afraid of something that is not a danger at all.

So, I cannot entirely agree with the idea that different parts of the mind compete with each other for dominance. Some people believe that these different parts of the mind are engaged in some kind of argument, one that will have a winner and a loser.

I would prefer to think of the different parts of the mind as seeking harmony. The part of your mind that is warning you of danger is not your enemy. It does not need to be controlled or reined in. It needs to be acknowledged and heeded. If the message is unclear or confused, your rational faculties should go to work to make its warnings make sense.

If you think that the part warning you of a bubble is irrational, you are also saying that the part telling you not to sell your inflated assets is rational.

In effect, if reason brings us into closer touch with reality, when confronting a bubble, the two parts of the mind have merely changed roles.

The rational part has been transformed into an irrational defender of bad judgments while the irrational part, the part that operates outside of the normal bounds of conscious reflection, has become the only rational indicator of danger.

The mind has great difficulty understanding that its rational faculties can be enlisted to support bad decisions, almost as though they were devils disguised as angels. At those times we need to ignore the voice of reason, because it is not really very reasonable and embrace the irrationality that is warning us of pending doom.

Is Gold in a Bubble?

I like to think that Bob Dylan was the first to make a fetish out of the question: How does it feel? I would find that a saving grace for the amount of annoyance that this sentence has caused to so many people. MP3 download of the original here: Like A Rolling Stone.

Now that we have all learned the rather dubious skill of tuning in to our feelings, we should learn how to read the feelings of other people. Few skills will get you further in life than learning how to attune yourself to the feelings of your friends.

But, what about the feelings of the general public, or rather, the investment community? Every investor knows that doing well in the market, in any market, involves sussing out the general sentiment and then doing the opposite of what everyone is doing.

If everyone thinks the market is going up, you should sell. If everyone thinks the market is coming down, you should buy.

Clearly, irrational exuberance, of the kind that characterizes what are called market bubbles, is a sign to run for the hills.

Bull markets climb a wall of worry. Or so they say. But if everyone has stopped worrying, to the point of being carried away on a wave of market ecstasy, then you are entering into a bubble.

When everyone has invested everything they have in something-- when they have gone all-in-- they have less money remaining to make new investments. And without fresh money to keep buying the asset, its price will fall.

But, how does it feel when the market is in a bubble? If you are the proud owner of a stock that is rushing toward the moon, that is being recommended by everyone, that is making you very, very rich on paper, you are going to feel very smart indeed.

You are going to feel good about yourself. You are going to feel proud of your accomplishment.

You might even think that everyone who is touting your stock is actually singing your praises. You are going to feel that your judgment is infallible. The higher the stock goes, the more confident you become. The more confident you become, the more you decide to commit fresh capital to your position.

All of those people who were scoffing at your silliness for buying the asset before, are looking to find a way to get in to the game.

One thing is certain. If your investment is in a bubble you are not thinking that it is in a bubble. You do not feel that your exuberance is irrational. You feel that the stars have aligned themselves to give you what you so richly deserve. It is a species of happiness.

A bubble need not feel like getting caught up in an emotional wave. You are, dare I say, too smart for that. Having done your homework and worked out all of the eventualities, you have concluded that nothing can possibly go wrong. You decide to go all-in. Not only that, but you are so full of confidence that you are sleeping like a baby.

Until the bubble bursts. At which time you feel like you have been had, like you are the world's biggest fool. You have become like Icarus, he of the melted wings, and you do not feel very good about yourself or anything else.

A market bubble is the final, blow-off stage of a bull market. Bubble investors miss most of the bull market and try to make it all up in the market's final upward thrust.

Let's say that a bull market is going on out there and you are missing it. Is there anything more frustrating than thinking that you could have, should have, would have bought the stock when it was selling for pennies, only to see it ascend into the stratosphere?

It's one thing to see the price go up. Quite another to see it take off into bubble-land. The more it goes up the more you suffer the indignity of hearing about the hefty gains-- on paper, albeit-- that your dimwitted neighbor is making.

You weren't very tempted when it was just a garden-variety bull market. But once it becomes a bubble, you are going to be tempted. You will get caught up in what is called the madness of crowds, and you will starting thinking that you can catch the tail end of it. You are so smart that you will be able to get out before it crashes.

So, you commit a small percentage of your capital. The asset goes up. You feel smarter and smarter, and you celebrate your success by committing more and more of your capital. Then, you feel better and better, and start believing that there really is something behind the bubble. It really cannot come down. It will keep laying the golden eggs. It's a brave new world and the laws of economics and human nature have been repealed.

Above all else, if you are involved in a bubble, it feels good. While a bubble is going on, if you are not involved you feel like a chump.

At the extreme, in the mania stage, you sell your house and all of your possessions to buy an especially valuable tulip bulb. Link here. Houses come and go; they get built and rebuilt. A unique tulip bulb is forever; it will always have value; it is God's creation.

When a stock or a commodity is in a bubble, you feel a strange  confidence, as though you have discovered the Holy Grail and nothing bad can happen to you. You feel immune, immortal, and eternal. Otherwise why would you sell your house to buy a tulip bulb?

More than a few very savvy people believe that gold, yellow dirt, has now entered its bubble stage. They feel that gold is intrinsically worthless and that its recent bull move has been fed by fear. 

Yet, gold is and always has been a universal medium of economic exchange. Which is why some say that there's no fever like gold fever. When all is said and done, tulips are ... flowers.

Today, smart people feel fine about not being invested in yellow dirt. They are convinced that gold is intrinsically worthless and that the fools who have been collecting it are about to get their well-deserved come-uppance.

When the only people recommending an investment are people you consider to be kooks and cranks, it may be going up, but it is probably not in a bubble. When the sane and sensible folk, the great minds of our time, give in and start recommending it, then you are getting into a bubble.

If gold is in a bubble, then everyone should be going all-in on gold. The average person, the retail investor, your taxi driver and dry cleaner, would be counting out their gold coins or chasing after gold mining stocks.

When it comes to physical gold, that is clearly not the case. See Brett Arends article today in the Wall Street Journal about participation in the gold market. Link here.

Of course, when large numbers of people think a stock or a commodity is in a bubble, and when they are, in consequence, afraid to invest, by definition, it is not. When those who have not invested in it feel superior to those who have, it might be a bull market, but it is not a bubble.

The emotional valence of a bubble is designed to suck people in, not to warn them to stay out.

If you regret having missed the move, it might be a bull market. But if every fiber of your being is telling you to buy more, it's a bubble.

Thus, the real question: if gold is not in a bubble, but in the midst of an ongoing bull market, where is today's bubble? 

Is there a stock or a commodity that inspires so much praise and adulation, that has come to symbolize unstoppable future success, to the point where people believe with utmost confidence that its price will continue to rise to the heavens?

You may have your own candidate, but the first company that comes to mind, and that satisfies those predicates is: Apple Computer. Just about no one has anything bad to say about Apple or about Steve Jobs. For today's generation Apple is becoming what General Motors was for a previous generation.

Everyone feels that Apple can do no wrong, that it cannot fail, that it can print money. To my somewhat jaded emotional sensors that feels a lot like a bubble.

Most people will look askance at this suggestion, thinking that it represents an opinion that is so far outside of the mainstream that it is positively risible, then, that is another point in favor of the idea that it is in a bubble.

But that is the emotional difficulty about identifying a bubble. You cannot proclaim an asset is in a bubble phase when you believe that it is worthless. You need something that you believe to be so supremely valuable that you would never even question whether it is worth what you are paying for it.

If everyone was saying about Apple what they are saying about gold, then it would be a good time to buy some more.

If Hegel Ran Wall Street

Philosophy is a fun way to pass the time. At least, sometimes it is. Philosophy professors can be fun. They can teach us things that we never imagined, and they can stimulate us in ways that provide longstanding benefit.

A lot of them also want to be relevant.They want to use their advanced wisdom to offer practical advice, or, at least, to show us how to analyze real life.

For being philosophers they are somewhat at a disadvantage when it comes to practical concerns. Their experience does not include dealing with or even observing the workings of, say, the financial markets.

Philosopher J. M. Bernstein does not exactly want to show Wall Street the error of its ways, but he is happy to allow Hegel to shed some light on its follies. Link here.

Hegel was a great philosopher, but he was not a great capitalist philosopher. He criticized the philosophers who had created the intellectual fundaments of the free market system.

Many people consider Hegel to be among the great minds of Western civilization. And many others assume that because he was a genius, he was also right. He might have been, but there are plenty of geniuses out there who think that Hegel was anything but right.

For most people, Hegel derives his status from the fact that they cannot understand a word of what he is saying. Others are in awe of Hegel's genius because he discovered that, at night, all cows are black.

If you would like to read a clear and intelligible account of Hegel's philosophy, placed within the context of his fellow German idealists, I recommend Josiah Royce's book: Lectures on Modern Idealism.

Among many philosophers German idealism is the gold standard for sophisticated thought. Kant and Hegel lead the band; they are philosophers' philosophers.

Before taking a look at what Hegel would do if he ran Wall Street, and before looking at his thought on its own terms, let's examine its cultural consequences.

A while back I posted about a book by Joel Mokyr that made the following point: that the British Industrial Revolution grew and developed on the basis of the philosophical and cultural influence of people like liberal political and economic philosophers like David Hume and Adam Smith. I though it an important point, and still do.

When we look at German idealism, one thing that we can note is that it produced a culture that was instrumental in fostering government policies that one can only cause an unspeakable monstrosity.

And that is true even if we do not add the pernicious influence of Hegel's most famous acolyte, Karl Marx.

Say what you will about David Hume and Adam Smith, submit their work to all of the Kantian and Hegelian critiques you like, you would have been a lot better off living in the culture that their thought helped produce than you would have been in the culture that fed off of German idealism.

If you would have wished to live as a free individual, Adam Smith would have been a much better friend than Hegel.

I mention that to allow us to keep things in perspective. Philosophers contribute to cultures; they promote values and attitudes. It is entirely fair, in my view, to judge their works, not just on their own terms, but in relation to the kinds of cultures that their works have sustained.

Even if you do look at Hegel and Heidegger on their own terms, you will note that they believe that historical figures can embody their philosophies. For Hegel, it was Napoleon. For Heidegger, it was Adolph Hitler.

Where Adam Smith might have us admire George Washington, Hegel believed that Napoleon represented an important historical moment in the great dialectic between matter and spirit.

Before examining the merit of different philosophers, ask yourself who best represents your values: George Washington or Napoleon?

You should not swear adherence to a philosophy just because it is smart, even brilliant, even the work of genius.

More than being a great philosopher, Hegel was a master mythmaker. He did not think through practical problems and draw conclusions from the evidence. He invented a grand mythic construct and jammed all of reality into it. The most famous myth was the dialectic of the master and the slave.

Where Hegel posited the inevitability of the slave's rebellion against his master, because it fulfilled the terms of his narrative, more than a few politicians and activists have incited rebellion because they believed that reality had to mimic myth.

Hegel told stories; he spun narratives; he believed that these stories drove history.

Narratives have a logic all their own. Unfortunately, the logic of fictional worlds is not the same as the logic that is at work in the marketplace.

Among other reasons, because fictions are never judged by their link to reality, or their ability to render reality; they are judged by their logical coherence and consistency.

This tell us why despotic regimes, especially those that are run by self-appointed philosopher-kings, do not care about the consequences of their policies. They care only about their ability to maintain their own power.

If you want to do a Hegelian analysis of Wall Street you need to fictionalize the players, to the point of caricature, and make them into shadows of themselves.

If you read Bernstein, you will find that it makes a good story. That, in itself, does not mean that it is true or useful.

Once you extract the relevant fiction, the syntactical maze of Hegel's philosophy becomes strangely simple, even simple-minded.

As Bernstein explains, Wall Street got into trouble because bankers were letting their lust for profit lead them to the worst extremes of human financial irresponsibility.

Given that the profit motive must lead to such excesses,  the world now needs more regulation. Bernstein explains that if Wall Street's bankers had studied their Hegel they would welcome regulation because regulation would lead it back onto the pathway to virtue.

Bankers are motivated by their unbridled lust for profit, and without regulation they will not perform any social useful functions, like allocating capital efficiently.

As I say, this is easy to understand. It comes straight from the Obama playbook. You have heard it many times before. So many times, that it is useful for us to allow Bernstein to show us how it derives from German philosophy.

But, is it real? Of course, it isn't. When you make Wall Street bankers into a perfect embodiment of Adam Smith's philosophy you ignore the fact that Adam Smith did not see people as the incarnation of his ideas.

And, it is far from being self-evident that the financial crisis was caused by under-regulation. Nor is it self-evident that the mortgage and housing markets were an exemplary instance of unfettered free markets.

One might argue, and many have, that the invisible hand of the markets was overwhelmed by the heavy hand of government in the housing and mortgage markets.

Ignoring the role of government facilitates Hegelian myth-making, but we should not ignore the role of federal agencies in the mortgage market meltdown. Whether the Federal Reserve or Fannie Mae or Freddie Mac or the Congress or the administration... the market was anything but out-of-control. It was overly regulated.

Had they been left to their own devices, bankers would have exercised prudence and caution in making mortgage loans. Once a government agency tells them that they must make loans to people who cannot afford to buy houses, or that they are allowed make loans to people who cannot make down payments or provide proof of sufficient income, you are not dealing with a free market.

Think about this: left to his own devices, your everyday banker would tend to exercise caution in making loans. Government regulators are under no such constraints. They are not dealing with the bank's money. They are following their own, or Hegel's ideas.

Thus, when they do not like the looks of the world produced by the free market, they are more than happy to suspend it or nudge it in the direction that would satisfying their ideas and theories.

When Hegel insists that bankers are driven by their venal impulses, while the government, naturally, would tend to represent the public interest, perhaps he has simply gotten it backwards.

One could even argue that the more strict the regulatory atmosphere, the more people will be pushed and prodded to cheat, to game the system, to take whatever they can get.

By my lights, people are not naturally venal monsters. Excessive attempts to twist them into a form that satisfies idealistic thought will bring out the worst in them. 

America the Irrational

Ben Smith of Politico sees it as a sign of liberal despair. Link here.

Liberals like George Packer of The New Yorker and Andrew Sullivan of The Atlantic are in despair at losing the argument. They are none too happy to see the national mood and public opinion speeding away from the principles they hold dear.

They doubled down on Obama. They promised the moon and the stars, hope and change. Now, they are trying to come to terms with the fact that America is about to vote No in an election that has become a referendum on their president.

How can they rationalize their own poor judgment? East, they can denounce the great majority of the American people for being irrational.

Ben Smith identifies this developing trope in two important liberal journalists. We will surely hear more of it.

Sullivan sternly declares, "that unreason seems to have taken an almost pathological turn. It is as if America is intent on destroying itself, its civil society, its fiscal future, and its next generation in an endless fit of mutual recrimination, neurotic nationalism, and religious division."

When America was being swept off in a rapture over an untested, untried, and inexperienced presidential candidate, did you hear Andrew Sullivan denouncing America for being pathologically irrational?

When Barack Obama was spending trillions of dollars of borrowed money on a failed attempt to produce new jobs, did you hear liberals complaining that he was destroying America's fiscal future?

And when Barack Obama turned out to be the most divisive president in memory, the kind of master dialectician whose goal was to sharpen differences between himself and the opposition, did you hear any liberal say that he should become the conciliator that he pretended to be during the campaign?

When the Andrew Sullivans of this world gnash their teeth and wring their crying towels over the overreaction to terrorism, do you ever hear them try to explain why the vast majority of hate crimes in this country, around 67%, are committed against Jews, while a small minority of said incidents, around 7%, are directed against Muslims?

True enough, the American people are turning against Barack Obama. Equally true, no one really knows how the election will turn out. How can a rational person deliver a graceless concession speech before the election has even been held?

And since we are dealing with the rational and the irrational, a clever person might say that the American people were duped, tricked, deceived, and defrauded by the Obama election campaign and by those who so fervently supported it in the media.

Someone less generous than I could easily argue that voting for an untested and inexperienced candidate, based on no evidence whatever, was an exercise in irrational hope.

Now that the American people have seen the error of their ways, why not say that they have returned to reason? Being angry does not make you an irrational loon. It depends on whether you have a good reason for the anger and express it appropriately, at the ballot box.

Writing in the New Yorker, George Packer will have none of such caviling. In his words, even though "crazy, murderous violence hasn't spread across the land,... unreason, cheered on by cable news, has won the day. We have undeniably gone sour on interfaith tolerance."

One does not want to nitpick, but there are places in this world where crazy, murderous violence is, or has been, the order of the day. Does Packer know which countries have been inflicted with extreme intolerance? At the least he should know that America was not among them.

Back in the old days liberals would go to the proverbial mat to defend the first amendment rights of someone who was going to blaspheme a deity. No more. A foolish pastor from Florida has been denounced and threatened by the highest government authorities for saying that he was going to burn a book that many people take to be holy.

Not only were liberals not defending his rights, they were using the occasion to denounce cable news, i.e. Fox News, and anyone who had the temerity to refuse to follow their intellectual lead.

Of  course, when Packer calls Obama "the voice of reason incarnate" he is not just making a fool of himself, but he is echoing the fourth Gospel. As everyone knows, the Gospel according to John opens by saying that the Logos, the Word, aka, Reason, was made flesh in Jesus Christ.

At least Packer is not hedging his bets. He does not see Obama as a new Messiah. He sees Obama as the old Messiah.

To buttress his argument about irrationality, Packer offers a quotation from Jonathan Franzen. He calls it: "an epigraph for our times."

You may or may not know it, but modern liberals bow down before creative talent. They imagine that novels present higher truths and that we must accept them as such. We can neither question nor doubt the opinions of a great artist.

I confess that I am not a fan of Jonathan Franzen. I tried reading The Corrections: A Novel and, after a couple of hundred pages, found it tedious and uninteresting. I have not read his more recent tome: Freedom: A Novel.

I will mention in passing that I used to teach English literature at the university level. So, I do have some serious credentials in the field of literary fiction.

I respect novelists. They traffic in make-believe. They create fictional worlds. They tell stories about things that are not real. There is nothing wrong with that.

But that does not make them authorities about much of anything beyond the fictions they create. When the nation is in crisis you are not going to convene a group of novelists or stand-up comics to analyze the situation and to offer guidelines for dealing with it.

That much being said, here is Franzen's line, which Packer seems to believe can stand on its own, because it says it all.

"The personality susceptible to the dream of limitless freedom is a personality also prone, should the dream ever sour, to misanthropy and rage."

It may sound as though Franzen is saying something profound. In fact, he is saying something that makes very little sense.

When I first read the sentence I did not see a piece of enlightened wisdom. I saw a glob of rhetorical phlegm. I was happy that Franzen had cleared his throat, but less happy that he and George Packer want us to examine it as though it were a thing of beauty and a pearl of wisdom.

Packer may not have noticed, but the sentence is poorly written, clunky and awkward, without much substance. It is a throw-away line.

It says, in short: "The personality ... is a personality...." A fine tautology, but no real wisdom there.

I think it stretches things to say that your personality is susceptible to anything. You might be drawn to a dream of limitless freedom, but I doubt that you are identical to your personality.

When it comes to dreams of limitless freedom, artists are the people most susceptible to get caught up in such dreams. Isn't that what attracts people to creative work? Aren't artists prey to the illusion that, unencumbered by fact and reality, they can make it up as they go along. Don't artists believe that no one, not even Oprah, can interfere with their ability to shoot their mouths off.

I suspect that Franzen is not referring to artists. He is probably referring to libertarians. If he is, then he is simply off the mark. No libertarian, not Milton Friedman, not anyone else, believes in limitless freedom.

Libertarians believe in the constraints imposed by the free market and by the free trade in ideas. They believe that free individuals should make the major part of their own decisions, unencumbered by too much government regulation. They do not and have never promoted a world of limitless freedom.

That they left for the artists.

As for whether the dream sours or goes sour, let's not nitpick. I am sure that Franzen has twisted the syntax to sound as though he is an artist.

As for Franzen's salient point, that when people who dream of limitless freedom are disappointed their personalities, as he would put it, are prone to misanthropy and rage.

Here, he might have a point. If he is talking about artists, that is. Adolph Hitler was a failed artist. When he failed at art he became an enraged anti-Semite.

I suspect that Franzen is not tell us to beware of artists whose dream has soured. 

And I doubt that he is referring to bands of enraged libertarians, because libertarians, being children of the Enlightenment, tend to be peaceful and reasonable folk.

If you want to find a group that is constantly enraged, in a misanthropic and also, to be fair, misogynistic way, why not evoke the example of Islamic terrorists, especially of the al Qaeda variety.

Did the terrorists become enraged because they dreamt of limitless freedom?

Not at all. They became enraged and lethal because they hated the freedom of others. They see freedom as a threat and a danger to their god. They caricature freedom loving people as licentious, as having no boundaries or limits. They hate it when people exercise their free will and choose not to worship as they do.

I hope that that clarifies the issue.