Sunday, January 2, 2011

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.


JP said...

"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."

Now they want to talk about it?


After we already sold the car crash and bought the cancer?

The only thing that QE2 is doing to me is driving me into my own personal bear market. I just experienced the worst 3 month financial returns in my 37 years of life. Hopfully it's temporary.

David Foster said...

In his 1960 book Science and Government, C P Snow argued that the most important decisions facing a society would increasingly be made, often in secret, by experts. As example, he used the secret pre-WWII British debate about air defense (radar vs other technologies) and the mid-WWII debate over strategic bombing.

Both the "global warming" debate and the current financial policy issues obviously involve considerable expertise dependence, although (unlike Snow's example)there is absolutely no justification for secrecy in the first case, and very little in the second.

I do think broadly educated and thoughtful individuals can usually form a reasonable judgment about the credibility of experts. In business, for example, any executive running a large and complex organization will have to make decisions about the value of what he is being told by his various experts...indeed, the ability to do so is a big part of what he is being paid for.

Stuart Schneiderman said...

I think that it's taken certain groups of people a long time to get a grip on things for two reasons. First, because it's a very complicated issue, with which they have never really engaged. Second, because they thought that it was just going to go away once Obama got in office. Now that they see that it's not, and that this is a longer term shift in reality, they feel the need to try to understand it.

Thanks, David, for bringing up the global warming debate. There we supposedly had all of the world's greatest experts telling us that it was real and that it was going to destroy the planet. Then it turned out that the evidence was a bit iffy, and that the experts who disagreed had been silenced.

And also, people became suspicious, reasonably so, about the fact that if we did what the global warming crowd wanted, we would tax ourselves into industrial and energy oblivion.

To that we should add that in a time of financial crisis, global warmism started to feel like an indulgence.

To your point, most people have come around to a more fair and balanced view of global warming, but it has certainly taken quite a lot of time.

Chuck Pelto said...

TO: All
RE: A Famous Old Saying....

....the people we call on to fix the system are the same people who got us into the mess in the first place. -- Stuart Schneiderman


Stupidity got us into this mess. Why can't it get us out.


[Life is tough. It's tougher if you're stupid.]

P.S. We've been 'stupid', putting these people in charge of our country.