OTHER BAD IDEAS
A number of other economists are speaking up about the ideologically driven economic theories that allowed our financial institutions to accept ballooning risk — and stave off the “danger” of regulation.
In Saturday’s New York Times, Joe Nocera cites Jeremy Grantham, “a respected market strategist with GMO, an institutional asset management company,” (Poking Holes in a Theory of Markets) who lays they blame on the efficient market hypothesis.
I think there is a lot more of this coming, and no shortage of bad ideas to blame. But the key is why was so much faith placed in such flimsy ideas? How were the minds of financial managers, economic gurus, investors, regulators, and the rest of us so easily swayed. How did we allow it to get out of hand?
Here I think we have to look at a host of unconscious motives that powerfully shaped behavior without being available for critical scrutiny. In my previous post I pointed to how the competitive race among financial firms seemed to pose a greater risk for them than the risk of default. Eying each other so intently, they could not keep their eyes on the ball. But then, of course, there was also the pressure we all put on the system for greater and greater returns. And our government’s ideological commitment to “free markets” and deregulation, and so on.
I think that instead of blaming specific ideas, it might be more useful to look at how we use them and how we think? Clearly we need regulation of markets more than we allowed ourselves to be persuaded we did, but we also need some intellectial and emotional self-regulation as well. We have to pay more attention to the unconscious processes that drive collusive behavior.