It is often said that to know where you are going, it helps to know where you have come from. Sage advice it seems, but when it comes to being human, a tendency to repeat the worst of the past seems strangely inevitable.
Whether government regulators refuse to mandate an industry contributing funds to political campaigns, or safety officials ignore an impending crisis for the sake of money or pride; human beings seem unwilling or unable to learn.
The paradox is sometimes stunning. As the 20th Century saw humankind advance in areas such as medicine and transport whilst later landing on the moon, it also saw around 170 million people killed in combat.
In his 1993 book, ‘Out of Control: Global Turmoil on the Eve of the Twenty-first Century’, Zbigniew Brzezinski, the former US National Security Advisor to President Jimmy Carter, estimated the actual number to be between 167- 175 million.
Conflict is a matter of fact of course as people and other animals compete for the same resources. Nevertheless, of equal concern perhaps are the many short-term decisions taken in the face of options that are seemingly better.
The 1920’s in America for instance, saw a time of expanding wealth that many saw as infinite. As Harold Evans noted in his book, ‘The American Century’; ‘The Great War, although hundreds of miles away in Europe, generated a boom in exports to lift the economy giving the average citizen an unprecedented shift in spending power. By its end though, as exports fell, two recessions hit the economy before mass production and construction helped to find its feet again.’
It would be easy to imagine the relief of a nation as people once again met with increasing levels of disposable income, and it was some of this emerging affluence that soon made its way onto the New York stock exchange. Here blinded by greed and endless excitement, investors saw their efforts multiply for much of the decade as perpetual speculation increased market bubbles.
In fact, many people borrowed money to purchase shares at inflated rates of worth so that when the markets later crashed in 1929, they were left owing more than a return on share sales could service. In addition to that and the run on deposits, banks failed in the thousands having lent so much to speculate with.
The short-termism was breathtaking.
MBS are essentially financial deeds of ownership with values for trading. A CDS meanwhile is an insurance agreement for a seller, an investment bank for instance, to pay a buyer, an investor, in the event of a loan default on something like a subprime mortgage.
They are also termed ‘Derivatives’.
The documentary, ‘Inside the Meltdown’, on the PBS news programme, Frontline, explained how by 2007, Bear Stearns, a major U.S investment bank, had bought hundreds of thousands of subprime, high-risk mortgages and turned them into deeds of ownership for trading. At the same time, it had sold hundreds of billions of dollars of CDS on the global stock market.
It effectively carried too much high-risk debt and as the housing bubble burst, the securities and swaps became worthless and investors sought redress.
The entangled debts, known as Systemic Risk, quickly devalued and spread like a forest fire through the American financial system, before hitting global stock markets. History began to repeat itself.
Joe Nocera, of The New York Times, expressed the notion of short-termism; “Accelerating house prices created a mentality amongst everybody involved in the mortgage industry, from the buyer of the house to the mortgage broker, to the bank to Wall Street; that housing prices could only go up”.
So as in the 1920’s, people’s hunger for fast money convinced them that a seemingly good thing knew no bounds. It remains the problem in need of addressing. How do you change a fundamental aspect of human nature?
Mike Petrucelli, a former Senior VP at Lehman Brothers said, “I think in hindsight it’s easy to see that there was a bubble, but you know, sometimes when you’re at a party and having a good time it’s hard to stop and leave the party”.
The basic question, it seems, has always been: how do you align long-term planning with the reality of short-term desires? The answer maybe lies not in trying to change human nature, but, once again, in altering the system.
Of course, this has long been recognised in anti-capitalist thinking, but then capitalism has consistently driven innovation and progress by virtue of its willingness to reward hard work. Perhaps therein lies the issue. Hard graft drives progress and reward, whilst often ignoring the needs of others.
Enter socialism, which in some of its guises seeks to promote equality for all. The competition for resources by its very nature though disputes the notion of balanced citizenship, in terms of reward not rights, because some people are naturally inclined to work harder than others; often regardless of incentive.
It seems a mess, but if governments could acknowledge that people’s short-term habits (that are clearly grist to the mill) need a different type of discourse to the way the free-market operates then maybe progress could be made. The nature of that dialogue however is a subject for scholars.
“It’ll happen again”, said Brooksley Born, in the documentary, ‘The Warning’. The former Head of the U.S Commodity Futures Trading Commission added, “If we don’t take the appropriate steps, there will be significant financial downturns and disasters attributed to this [derivatives] regulatory gap over and over until we learn from experience”.
During the Eurozone Summit of December 2011, it was mandated that countries become disciplined regarding government spending and taxation. Angela Merkel, the German Chancellor, summed it up when she said, “I believe this is a very, very important outcome after long negotiations because we are learning from the past and our mistakes”
We can all in truth, only hope.
- Harry George