Wednesday, October 20, 2010
For the past few years, we've heard a great deal about the irrationality of punters in the "market". And rightly so. We humans are a bunch of hysterical children driven crazy by bouts of greed and fear. Not to mention other feelings.
But we never hear about the same irrationality effecting policy-makers.
Somehow our regulators are seen to be above emotional pressures. They are the parents guiding the market, immune to the maelstrom of feelings that guides everyday economic decision-making.
Yet even a quick glance at recent history makes that assumption laughable. Take the following as several examples:
Did Hank Paulson act rationally in evoking the US TARP bailout of US banks? Even as it was created it morphed from a plan to buy toxic mortgages to one designed to recapitalise banks.
Or, how about the captains of global economic management at the IMF or the G20 who swung from recommending balls-to-the-wall stimulus to all-in austerity in the blink of an eye.
Or, how about the Mastro himself, Alan Greenspan, who was so irrationally committed to a one-eyed libertarian view that he overlooked the most heinous debauching of banking practice in history.
Or, how about the delusion of Australian regulators who felt the banks could accumulate vast quantities of offshore debts without any adverse consequences for the economy or themselves? Not to mention yesterday's revelations (rumours) about the consequent shadow dance taking place between the RBA and the banks.
Perhaps it is the staid appearance of regulatory authorities that so fools us (though it must be said there was nothing rational about Alan Greenspan's choice of glasses). Or, it is the great, grey buildings they occupy that offers the perception of an immovable solidity.
Personally, being a media hack, this blogger puts it down to the trappings of power. That cloak of rationality, legitimacy and above all objective reality, that power provides.
We irrational little sheep don't want to challenge that. To do so would be to expose ourselves to our own vulnerability, alone and unprotected against a very large and cold universe (and this blogger is happily married).
Nonetheless, there are days, this being one of them, when the fog put forth by the talisman of power is rent and we catch a glimpse of the unsteady hand at the wheel of our fortunes.
As today's links make clear, a battle royal is underway about how best to handle America's slow recovery, China's speedy one and the fallout for everyone else.
So far as this blogger can tell, there is no clarity or consensus of thought on these issues.
It is at such times that we must rely on another form of irrationality to guide us: institutional memory. Regulators will do what they've always done, until the roof caves in, and probably still then.
It's always possible that the G20 will negotiate a settlement between the two great powers in Seoul. But unlikely. And in that event QEII will proceed with all of its consequences.
In Australia, it's always possible that the RBA and banks will negotiate a settlement of mutual satisfaction. But unlikely. Wouldn't it more rational to allow a new Wallis Enquiry to throw the light of reason onto how the bank's offshore debts have rewritten our financial structures?