Author: ken

Ignoring the Dangers – and the Lessons

Psychologists have started to comment on the emotional impact of the disastrous oil spill in the Gulf of Mexico.  They note its uncanny, nightmarish qualities as well as its resonance with other vital issues we are facing.

The images haunt us:  a huge rig toppling in flames, oil gushing from a broken pipe, pushing up inexorably from deep beneath the surface.  The black gold is toxic to wildlife, to our fragile ecology as well as thousands of livelihoods.  And, until last week, we were powerless to stop it.  As The New York Times put it on Sunday:  “the imagery insinuated itself into our collective consciousness — gnawing evidence that something enormous and confounding was still operative, despite the labors of our brightest engineers and our most expensive machinery.”  We are not in control.

It evokes other problems as well, noted The Times:  “The deepest damage of the spill may be the loss of confidence in institutions. . . .  Combine that with public exhaustion over two wars, economic insecurity and disgust over the return of bonuses on Wall Street.”

I would add to that list our experience of the disastrous credit bubble, despite sophisticated “risk management” systems designed to prevent such things from happening, and the failure of regulatory agencies to manage it effectively.  Moreover, unemployment is not responding well to government efforts to contain it.

“All of these things work together.  The national psyche is very depressed” said Nadine Kaslow, a psychologist at Emory University.  “The spill has been going on for so long and there have been so many attempted fixes that people become less trusting that things will really improve. So this becomes a little less front-page news, if this really works, but there’s some sense that some other disaster will take its place.”  (See, “A Spill Into the Psyche, and a Respite.”)

Conventional wisdom suggests that we should discount such emotional parallels.  Yes, they may work together in the national psyche, but we are trained to think each problem should be dealt with on its own.

The danger, though, is that our emotional unconscious may well be detecting real connections.  If we discount the parallels and neglect what we know but don’t know we know, we will under-react.  And there are real links among these issues:  Overconfidence in technology, inadequate controls for risk, and Groupthink that suppresses dissident or non-conforming point of view – particularly under the pressure of corporate competition and the drive for profits.

Maybe people are right to be skeptical about the solutions that are proposed and to have nightmarish thoughts.  As we aggressively assert our control over nature though technology, like Dr. Frankenstein, we neglect our own limitations and latent desires – and all too easily create the lethal messes it will take us years to recover from.

Debating Creation

Intriguing new Apps for the iPhone help people debate the existence of God.  What’s that about?

A recent article in The New York Times noted:  “In a dozen new phone applications, whether faith-based or faith-bashing, the prospective debater is given a primer on the basic rules of engagement — how to parry the circular argument, the false dichotomy, the ad hominem attack, the straw man — and then coached on all the likely flashpoints of contention.”  (See, “You Say God Is Dead? There’s an App for That.”)

There is general agreement now among those who study such issues that, after centuries of efforts to prove god exists, or does not, we have settled into an uneasy truce.  Agnostics have the better arguments, though they may not have the numbers.  Some school boards may still get hot and bothered about teaching Darwin, or they may want to see some version of “creationism” in the curriculum.  But fewer and fewer people really seem to care.  It’s become a matter of opinion – and politics.

The appearance of the Apps seems to trivialize the issue.  Scoring points, vanquishing opponents – what does this have to do with real faith?  It’s clear that no one will be converted into a believer or a skeptic as the result of a quick jab or a clever riposte.

Moreover, polarizing the issue leaves out some of the more nuanced ideas one could entertain.  What is God’s relationship to the human race?  Is he a man? A woman? A hermaphrodite?  A group?  Is he still around?  What’s really at stake with these portable debating points?

But the appearance of the phone Apps is probably more about neutralizing the issue even further.  If the existence of God is in the category of a debate topic, then it is a set of disagreements we have come to accept.  Heresy no longer bothers us.  It doesn’t even exist in the sense that society is not outraged and mobilized to protest.  Apostates no longer alarm us. You take your choice. We can live with it.

Those who wait for the Second Coming are indulging their private interests and passions.  Important, yes, but only to them.  It is not longer a matter of public significance.

Like a sports match.  People take sides, feelings get inflamed, but no lives are likely to be lost as a result.  As in all forms of play, one wants to win, to be sure.  In a sense, so long as one is playing by the rules, it’s the effort and skill that matter.

Spectators and players like to say, “Let the best man win.”  When the match is over, the participants start planning the next match, hoping to win next time.  Most important of all is being a good sport.

Or Financial Superstition?

Investor gurus constantly seek to be heard, building up their reputations, sometimes also seeking customers. Newspapers, magazines, blogs, newletters and journals are full of their financial advice. Who to believe?

According to one advisor who writes for The New York Times, take them all with a grain of salt:  It can be “dangerous” to take “what’s meant to be general financial information and acting on it, without first taking the time to figure out if it applies to your particular situation.”

He points out that many of them are reasonably well informed about how the stock market is likely to perform, or the bond market, or the price of gold.  But they are not informed about your situation or your particular needs.  They provide generic advice, information, even useful tips at times.  “As good as many of them are at providing a filter for information, and even providing general rules of thumb, you are the only one who can figure out how it applies to your life.” (See “Ignore Generic Financial Advice (Except This Post).”)

Then, of course, there is the problem of figuring out which gurus really do have their fingers on the pulse of the market?  Even if we had good information available to us about their track records, there is no way we can tell if they are right this time.

Worse, we are likely to be swayed into believing them because they express what we suspect is true.  They agree with what we think.  As a result, their power to influence comes less from the fact that they are experts but from how they echo or amplify or own half-formed convictions or fears.

Essentially it boils down to a form of superstition, not much different from the horoscopes one can also find in the daily paper.  Horoscopes, too, can be useful.   They can get one to think about potential scenarios for the day ahead.  They can provoke a reflective process, but they are not to be trusted as reliable guides.

There is no substitute for being mindful and for having conversations with others.  That helps you become aware of how your situation is different from others.  It adds to the store of ideas about potential trends, so you have a variety of perspectives.  And it leaves you with your own decision to make.

That may make us anxious and uncertain, but the fact of the matter is that we really are taking risks.  Anxiety reminds us that we are in uncharted territory, always at the edge of the unknown.

Do They Need to be Exorbitant?

Time was when CEO salaries were far less than the 300 times entry-level workers they are now, and actually CEOs seemed OK with that.  But then several things happened.

Organizational theorists argued that they needed more skin in the game to be motivated.  If all the reward for their hard work went to the owners, how could they keep engaged?  They suggested that stock options and bonuses would allow them to benefit more directly from their management success.

Subsequently, CEOs became competitive with each other.  Fueled by the myth of the “corporate savior,” i.e. the idea that the success of a company depended primarily on its CEO, they demanded higher and higher levels of compensation and perks.  Corporate boards, buying into the myth, were all too willing to give what they demanded.

But the habit did not catch on in Japan.  According to Businessweek: “Companies listed on Japan’s stock exchanges paid their chief executives an average of $580,000 in salary and other compensation last fiscal year . . .  about 16 times more than the typical Japanese worker. Average CEO pay at the 3,000 largest U.S. companies is $3.5 million, including stock options and bonuses.  (See, “In Japan, Underpaid – and Loving It.”)

There are reasons for this, of course, mainly having to do with the fact that Japanese executives tend to stay put.  Loyal to their companies, they don’t jockey for new assignments and jobs.  But their experience does suggest that the thinking that spurred the huge increase in CEO salaries in the U.S. was flawed.  CEOs do not need the salaries they have become accustomed to receiving in order to be motivated or committed.  In fact, it could be argued that it has made them more independent and greedy.

Now, of course, it’s too late.  Not only has it become established custom, but also we have created a new class of corporate and financial managers who believe they actually own the system.  They feel entitled to skim off the profits at the top for their own benefit, and they have persuaded many of us that this is the way the system has to work.

But if we think about the Japanese CEOs or even remember our own corporate history, we might conceive of pushing back.  Limits can be set, taxes can be raised, and a new public awareness can mitigate this massive redistribution of wealth.

What we don’t know we know about access to ownership is that we are all owners – majority owners, by far – of our public corporations.  Though our pension funds, individual retirement accounts, college saving funds, etc., we hold the majority of shareholder votes.  But we seldom think to exercise that power or seek ways to exercise it.

What to Call It?

It now seems clear that we are in the midst of an exceptionally deep and prolonged economic downturn, but one of the difficulties in coming to grips with it is the problem of finding the right label.  The familiar term “recession” doesn’t do it justice.

A number of economists and journalists call it “The Great Recession,” bulking up a regular or normal recession to fit the bill.  In their impressive new book, Eight Centuries of Financial Folly, Carmen Reinhart and Kenneth Rogoff call it the “Second Great Contraction.”  And last week in The New York Times, Paul Krugman came out with the “Third Depression.”  He observed that unemployment “remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly.”  (See “The Third Depression.”)

In the midst of the credit crisis two years ago, government officials and bankers struggled to avoid a complete collapse of our financial system, one that they thought would surely bring on a “Depression.”  And when the system did not fail, they thought they had averted it.  Perhaps not.

Right now, of course, we can’t really know how long it will last.  Stocks occasionally rally, but that may not be the best indicator of how the downturn is affecting most of us.  At this stage, the recovery from unemployment seems very slow and discouraging. State and local governments are cutting services drastically.  Housing is still depressed.  Loans are hard to come by.  Pundits are preoccupied with how the economy will affect the November elections, and who will be blamed.  They seem to be less concerned about how it is affecting our lives.

We are in uncharted territory.  What experts choose to call it depends less on what they know than what their theories suggest.  Those who minimize the radical nature of what we are experiencing – who call it a “Recession” of one kind or another – are trying to fit it into the conventional framework of the booms and busts we have lived through since the end of World War II.  The underlying message is: “It’s bad, but not that bad.”

Reinhard and Rogoff are trying to take a longer view, actually an eight-century view, perhaps more of interest to economists and scholars.  The policy implications of that are not yet clear.

Krugman, on the other hand, views the crisis as a critic of government policy.  For him, a mistaken emphasis on the perils of deficit spending will recapitulate the mistakes that led to the “Great Depression,” virtually insuring that it will happen again.

It would be a mistake to see these differences as abstract disputes, relevant only to specialists.  Each suggests a different level of urgency in combating the deprivation and pain of unemployment, closed schools, reduced services, and financial insecurity.