One of the most striking things about the reaction to the current financial meltdown is that, as one of the participants put it: ‘No one really knows what to do.’ The reason is that expectations are part of the game: how the market reacts to a particular intervention depends not only on how much bankers and traders trust the interventions, but even more on how much they think others will trust them. Keynes compared the stock market to a competition in which the participants have to pick several pretty girls from a hundred photographs: ‘It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be.‘ We are forced to make choices without having the knowledge that would enable us to make them; or, as John Gray has put it: ‘We are forced to live as if we were free.’
Joseph Stiglitz recently wrote that, although there is a growing consensus among economists that any bailout based on Henry Paulson’s plan won’t work, ‘it is impossible for politicians to do nothing in such a crisis. So we may have to pray that an agreement crafted with the toxic mix of special interests, misguided economics and right-wing ideologies that produced the crisis can somehow produce a rescue plan that works – or whose failure doesn’t do too much damage.’ He’s right: since markets are effectively based on beliefs (even beliefs about other people’s beliefs), how the markets react to the bailout depends not only on its real consequences, but on the belief of the markets in the plan’s efficiency. The bailout may work even if it is economically wrong.
There is a close similarity between the speeches George W. Bush has given since the crisis began and his addresses to the American people after 9/11. Both times, he evoked the threat to the American way of life and the necessity of fast and decisive action to cope with the danger. Both times, he called for the partial suspension of American values (guarantees of individual freedom, market capitalism) in order to save the same values.
Faced with a disaster over which we have no real influence, people will often say, stupidly, ‘Don’t just talk, do something!’ Perhaps, lately, we have been doing too much. Maybe it is time to step back, think and say the right thing. True, we often talk about doing something instead of actually doing it – but sometimes we do things in order to avoid talking and thinking about them. Like quickly throwing $700 billion at a problem instead of reflecting on how it came about.
[Extract. Appeared in London Review of Books on October 10th 2008.]