Fear and greed are terms that make light of the uncertainty in the finance world. The author includes absorbing interview material from public and private bankers in the United States, UK and Australia. Published in the United States of America by Cambridge University Press, New York www.cambridge.org.
Interviews 2000–2002
Chia Sieu Wong: former investment manager for sixteen years with a large Wall Street investment firm and other investment firms. James Grant: Publisher-editorGrant’s Weekly Interest Rate Observer; regular finance commentator on CNN and panellist on Wall Street Week. Brian Hale: Wall Street correspondent, Sydney Morning Herald and The Age (formerly, later forThe Times).
Preface
Paul Ormerod supported all my unorthodox endeavours, suggested interview questions on probability, introduced me to Meghnad Desai, Robin Marris and others in London. Both exceptional themselves, Carol Heimer helped me on one path to all the best in Chicago’s economic sociology, while June Zaccone sent me to the best New York economists. Beyond my School, Michael Johnson saw the whole point of my early idea for the research; Alan Morris and Robert Milliken helped introduce me to financiers and journalists.
1 1 Global Markets or Social Relations of Money
The focus of this present analysis is on the forgotten element – the necessity, and the inescapable insecurity, of ‘trust’ and its emotional consequences – within this mysterious world of the financial heartlands; it is not on whether individuals are willing punters or on the operation of markets per se. In contrast to private bank money, high-powered money is ‘the monetary debt of the government and its central bank, currency and central bank deposits’, sometimes referred to as the base money. Similarly, in the USA Thomas Jefferson thought ‘the banking establishment more to be feared than standing armies (Galbraith.
2 2 Emotion in the Kingdom of Rationality
Yet this trust is hardly on the part of millions of shareholders, since they do not ‘own’ the firm. Uncertainty – the unknown future – simply cannot be calculated or dealt with logically, so habits and emotions are essential. In gambling odds, ‘the past is irrelevant’ and the future is your only source of assessing a better prospect (‘All too human’ 2002; Gittins 2002).
3 3 The Financial Media as
Institutional Trust Agencies
Keynes, as we will see later, was far more perceptive on the role of ‘the News’ in speculation. The financial press have uncovered some pretty big scandals here over the last ten or fifteen years – the Barlow Cloud scandal, Maxwell, BCCI. A newspaper article of 1995 criticised a diversified company: ‘The hodgepodge of businesses it owns bothers Wall Street.
Kadlec: Generally you’re going to find it at the biggest news organisations – the people at CNBC have been through it enough. Everyone has a vested interest in sustaining the myth, whether it’s a broking firm, whether it’s the media. The importance of ‘the News’ to investors is evident in the fact that insider trading is unlawful because it provides an unfair advantage to buy or sell on ‘news’ – say from boardrooms – that is not yet public.
During a bull market, finance news ratings will be high as there will be an obsession with ‘the News’ about prices. In digesting ‘the News’, concentrated focus is given, it is dwelt upon and seen ‘in magnified proportion to its background. To return to the finance media, modestly well-off populations with worthless dot.com shares stopped watching after 2000, with no point to their obsession with ‘the News’.
Journalists report speculation on ‘the News’ with its related emotions of trust, fear and distrust as these are generated by a finance sector routinely seeking ‘direction’ about the unknowable.
4 4 Emotions in the Boardroom
Heclo & Wildavsky called their research on the British Treasury of the 1970sThe Private Government of Public Money(1981). On the question of dispositions, comparisons of two chairmen of the US Federal Reserve hardly show personalities to be important. Nonetheless, he was the herald of the ‘New Economy’, the productivity miracle, and he took a lot of risks with monetary policy.
During his time a president of the Australian Council of Trade Unions was on the RBA Board. This partly depends on the appointment process which, in Australia’s case, is by the government of the day. The economists tend to be rather better at appreciat- ing the inherent uncertainty of the models.
This manager in another fund talks not merely of the ‘herd’ argument but of fear. Expertise in the face of uncertainty must include extensive due diligence proce- dures, according to a now former Director of the UN Pension Fund in New York. New credit instruments [and] the globalisation of the financial markets has really brought with it. the mathematical quantification of risks.
In contrast,future-orientedemotions are inescapable, because of the obsession with costs under extreme uncertainty.
5 5 Credibility and Confidence in the Central Banks
Chamberlain: This is correct in the history, which gave rise to the immortal phrase that regulation was ‘chaps letting chaps off over lunch’, the days when people talked about the ‘governor’s eyebrows’ – and if you were actually invited for tea at the Bank of England you really knew that you were in trouble. Others agree that central bank independence leads to ‘following’ the market (Grahl 2001), or at least runs the risk of replacing the ‘short-termism of politicians’. In the new era, the size of the Fed Chairman’s briefcase became a source for taking a punt on monetary change.
This seems democratic even if ‘the financial markets constitute the channel through which monetary policy actions are transmitted to the economy. Central banks’ control over interest rates is at ‘the shorter end of the maturity spectrum’ but it affects. They use the metaphor of a dog’s leash, ‘transmitting the owner’s (the central bank’s) command to the dog (the economy)’ (Blinder et al which neglects how pushing a leash is ineffectual for a sleeping dog or a depressed economy.
What is good for markets is not necessarily good for the public.The markets thrive on volatility while the public dislikes it quite intensely. Gramley: As their understanding of the Fed has grown, their trust in the Fed has grown. Also] more people and more and more central banks are coming to agree that as well as being very, very short-term, markets – probably it’s the same thing – change their views very quickly.
His was an almost puritanical, and in the true sense of the word, conservative, attitude.
6 6 Hierarchies of Trust
In the case of the Fed and the American bubble. there was no doubt in my mind that it was a bubble. You get a lot of odium.The classic statement about central bankers is to take away the punch bowl when the party is warming up, not when a riot is about to break out. Fraser: Politicians will never change their spots and they will say when it suits them, when interest rates are rising, ‘the central bank is doing it’.
Perhaps if Greenspan continued to talk up that ‘new economy’ the Fed could avoid raising interest rates as employment rose. A few have done in the past – some of the ones that I find very interesting people. The head of the equity division had conducted a survey to find out ‘the complete details’ of every analyst’s work in bringing in business, such as ‘the degree [to which] your research played a role in originating.
In 1999, one proposal that a company’s financial statements be ‘fairly’ presented was roundly condemned by ‘the corporate and legal’ sector (Schuetze 2001: 7). But, the individual investor who is not part of the Wall Street in-the-know crowd doesn’t know it is going on. Institutional investors and pension funds demanded that management consul- tants ‘prove’ that firms are increasing shareholder value, so firms hire the same accounting firm as consultants to ‘clean up’ the firm’s management reputation to investors.
A good reputation – the attribution of trustworthiness (rather than luck) – is difficult to build and easy to lose whether deserved or not.
7 7 Overwhelmed by Numbers
Under FASB, the truck is not the ‘asset’; rather the asset is ‘the economic benefit. They are also vulner- able to powerful third parties like mutual funds, who want to hear ‘the future’. Their promises of the 1970s were based on assuming high inflation with high interest (to ‘cure’ the former, of course) which Equitable ‘forgot’ to revise over a whole thirty years of low inflation, according toThe Spectator(Trefgarne 2001).
Paying insurance means that we take the possibility of failure very seriously – the proof being that this expenditure will look unnecessary in retrospect if we actually manage to realize our goal in the Future. Synthetic portfolio insurance is essentially a form of self-insurance; it is the in- vestors who ‘buy’ the insurance who take on the risk. Tellingly, 19th-century texts dwelt on the long history showing that not one bank fraud had occurred where ‘the perpetrator was not honest yesterday’.
Indeed a ‘peculiar feature’ is noted about the whole former system, which is ‘the apprehension of fraud’ (Gibbons, cited Kindleberger his emphasis). As Arthur Stinchcombe says, ‘the problem with projections of time series is that they can only beaboutthose things the series is about’. They go into business to increase their profits, they’re not just sitting there –that’s the whole point.
Accoun- tants ‘know’ the most but cannot predict cost: conceding to incessant demands for prescience has cost their professionalism.
8 8 The Time Utopia in Finance
Armies of prognosticators and interpreters of asset values respond to ‘the News’ by abrupt reaction to unheralded announcements. As Keynesians describe it (Chapters 2–3), conjectures are about ‘the conjectures being made by others’ (Shackle. Mannheim describes a utopian state of mind as future- oriented – it is a hope – which appears to be incongruous with ‘the state of reality in which it occurs’.
Mannheim selected four utopias of moder- nity: the obscure chiliastic-anarchist; the well-known ‘humanitarian-liberal’; the conservative; and the ‘socialist-communist’ utopian mentalities. The utopian element or ‘the nature of the dominant wish’ is ‘the organiz- ing principle’ which ‘moulds the way in which we experience time’. The heart of Mannheim’s originality, his emphasis on time, seems so apt: ‘The innermost structure of the mentality of a group can never be as clearly grasped as when we attempt to understand its conception of time in the light of its hopes, yearnings, and purposes.
In 2000, ‘the News’ was focused on highly charged drives towards ‘the deal’ as an end in itself, when ‘old economy’ ‘dinosaurs’ were terrified of the ‘new economy’. The mythology of the ‘God of Opportunity’, Kairos, forever searches for ‘the genius of the decisive moment’. A necessary but not sufficient condition for change in liberal democracies is to ‘capture’ the state or at least gain legislative changes.
In 1985 theSunday Times joined in the hilarity, dismissing Tories who rebelled against Thatcher’s policies as ‘the grouse brigade’.
