This comes from the three-part WSJ series on the last days of Bear Stearns:
At least six efforts to raise billions of dollars—including selling a stake to leveraged-buyout titan Kohlberg Kravis Roberts & Co.—fizzled as either Bear Stearns or the suitors turned skittish. And repeated warnings from experienced traders, including 59-year Bear Stearns veteran Alan “Ace” Greenberg, to unload mortgages went unheeded.
Top executives resisted, in part, because they were concerned the moves would upset the delicate calculus of appearances and perceptions that is as important on Wall Street as dollars and cents. If Bear Stearns betrayed weakness, they worried, skittish customers would pull their money out of the firm, and other financial institutions would refuse to trade with it.
It’s an uncontroversial point, but I’m still shocked whenever I contemplate how the world of finance runs on carefully constructed, necessary fictions. When I ignored the business world, I always assumed it was build on bottom-line numbers and empirically deduced decisions—I thought it was far more technocratic than it actually is, and I totally overlooked such socio-psychological phenomena as the entrepreneurial “animal spirits” that Keynes posits, and the significance of inflation expectations, and consumer confidence, all of which can be ideologically sustained and manipulated. It makes me think there must ultimately be some renumerative use for the skills I learned as a literature graduate student, where we were taught precisely how to analyze carefully constructed fictions to reveal their carefully concealed presuppositions as well as their lacunae. It seems like the delicate calculus of appearances and perceptions requires a mastery of rhetorical skills required for building a believable picture of reality as well as a mastery of the tenets of risk management.
But the necessary fictions lead to problems like what Dean Baker details here.
Since the vast majority of economists failed to recognize two huge financial bubbles, the collapse of which had enormous consequences for the economy, it is reasonable to conclude that there is some inherent problem with the nature of the consensus within the economics profession. Either these economists hold views about the world that prevent them from seeing financial bubbles, or the sociology of the profession is such that they are unable to express independent opinions.
Perhaps economists are institutionally discouraged from promulgating opinions that might compromise the business built on fragile hopes.
// Notes from the Road
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