When I first moved into Singapore in 1999, we began living in a nice, well laid-out spacious condominium called Lucky Towers. Both my children were born there. We had to move out of that place in 2007 because of a rather unique Singaporean phenomenon called en bloc sale. If a substantial majority of the apartment-owners of the building are ready to sell their units, then the building is sold to a developer, who brings it down, rebuilds and sells newer and smaller apartments. The building was brought down recently. With that have gone memories—that thrive on identification and association—of the many who lived in the building for a long period.
Now, why is this personal tale relevant to the readers? It is relevant because human beings are complex, and for them, memories and thoughts matter more than experiential living, although rishis, spiritual texts and philosophers have told us to do exactly the opposite. Professor Daniel Kahneman reminded me of this when I read the concluding sentences of his four-part article on Bloomberg.com: I am my remembering self, and the experiencing self, who does my living, is like a stranger to me.
This is not too different from and, in fact, the same as Descartes’ “I think, therefore I am”. Thoughts and memories arise from the need of the ego to find expression in and through them. Shedding memories of successes, disappointments and betrayals, and imaginations of a grandiose future fuelled by ambition and being able to live in the present is to arrive at an ego-less state, almost. That is why most of us keep talking about it and very few get there.
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The thought of belonging to the billionaire club is said to have driven the former head of the McKinsey Group, although none can claim to speak for him. The thought of creating a Goldman Sachs outside of Goldman Sachs is said to have driven the former governor of New Jersey to take the bets that brought down MF Global.
Writing about the demise of MF Global, Roger Lowenstein reminds us that human nature loves risks and that it would be good to keep the gamblers where they could do no harm. That supports the recommendations for regulation, financial transactions tax and separating investment banking from deposit-taking retail banking. The culture of trading based on models is actually gambling because models are too imperfect to constitute a basis for responsible investment bets. It has also diminished the economic function of the financial sector.
In his blog, Emanuel Derman wrote that theories were facts. They describe the world as it is. Models are like metaphors: useful, but not very accurate. “The world is complex and you lose a lot by insisting that the things you don’t understand already fit into the boxes you imagine you do.” Professor Kahneman agrees with Derman. He concedes that he, too, is a victim of a weakness of the scholarly mind—theory-induced blindness—“once you have accepted a theory, it is extraordinarily difficult to notice its flaws”. It is difficult to change one’s mind because “disbelieving is hard work”. The recent behaviour of Keynesian academics and journalists is illustrative.
The Petersen Institute for International Economics (PIIE) sends out a weekly newsletter. In its letter dated 12 October, it had boasted—by providing links to all the references—that the Bank of England had finally heeded the recommendations of one of its fellows, Adam Posen, who is on the monetary policy committee of the bank, and embarked on another round of quantitative easing. The inflation rate in England is either 5.2%, or 5.6%, depending on which metric one looks at. So, let us see what quantitative easing delivers and if PIIE would remain as proud of the recommendations of one of its own then, as it is now.
Therefore, it is no surprise that we face a crisis today. After the end of World War II, we have not faced a global crisis because nature limited or cushioned the damage that we inflicted upon the world and ourselves. Further, there was a scope for catch-up growth after the enormous destruction that the World Wars I and II and the inter-war periods caused. Both factors helped the world to soak in the excesses of human behaviour. Now, payback time has come knocking.
It is time to come to terms with who we are and what we had wrought. There is no other choice. That is the place to begin. When asked what would make him positive on the outlook for the global economy or the markets, my friend Jim Walker wrote recently that it would require someone—a president, a prime minister, a finance minister or a central banker—to stand up and say “We were wrong”.
Since Baretalk is not very hopeful of that, he would wait until prices reach a point where they reflect all our excesses, failings and errors—past, present and future.
V. Anantha Nageswaran is a senior economist with Asianomics. These are his personal views. Your comments are welcome at firstname.lastname@example.org
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