Courtesy of the University of Leicester
and World Science staff
Western economies displayed the same kind of manic behavior as psychologically disturbed people in the runup to the 2008 credit crisis-and it could happen again, a new study claims.
Bankers, economists and politicians shared a "manic culture" of denial, omnipotence and triumphalism as they threw caution to the wind, said Mark Stein, a scholar from the University of Leicester School of Management in the U.K.
Observing but not heeding warning signs from the Japanese economy's collapse in 1991 and the 1998 crisis in southeast Asia, the financial world in the West went into an over-drive of denial, escalating its risky and dangerous lending and insurance practices, he said.
Stein reports his work in the research journal Organization, in a paper entitled "A culture of mania: a psychoanalytic view of the incubation of the 2008 credit crisis."
The causes of the banking collapse that plunged many countries into recession have been well documented. But why did economists, financiers and politicians fail to anticipate it? Stein argues that the financial world had been suffering from collective mania for a good two decades. "Unless the manic nature of the response in the runup to 2008 is recognised, the same economic disaster could happen again," he warns.
He defines the "manic" culture in terms of four characteristics: denial, omnipotence, triumphalism and over-activity.
"A series of major ruptures in capitalist economies were observed and noted by those in positions of economic and political leadership in Western societies. These ruptures caused considerable anxiety among these leaders, but rather than heeding the lessons, they responded by manic, omnipotent and triumphant attempts to prove the superiority of their economies," he wrote.
"The massive increase in credit derivative deals, industrializing credit default swaps and the removal of regulatory safety checks, such as the repeal in the United States of the landmark Glass-Steagall banking controls, were a manic response to the financial crises within capitalism," he added.
As a credit crunch loomed, senior figures, such as Ben Bernanke, the then chairman of the U.S. Federal Reserve Bank, drew a sharp distinction between economies of the West and Japan. Bernanke's "great moderation" speech in 2004 claimed the avoidance of extremes made him "optimistic about the future," Stein noted. Weeks before the collapse of Lehman Brothers in 2008, Bernanke claimed that the scenarios that befell Japan and south-east Asia could be avoided in the West.
Stein claims this behavior was also strengthened by "triumphant" feelings in the West over the collapse of communism.
"Witnessing the collapse of communism, those in power in the West developed the deluded idea that capitalist economies would do best if they eschew any resemblance to those communist economies, thereby justifying unfettered financial liberalization and the destruction of the regulatory apparatuses of capitalism. The consequences of this manic response have been catastrophic, with the on-going eurozone crisis being-in many ways-a result of this," he said.
"Whether one examines the actions of banks and hedge funds, or the limitations of ratings agencies, auditors, regulators and governments, a more worrying and deeper question emerges concerning why so many parties, more or less simultaneously, were implicated in such unprecedented and extreme risk-taking."
Bankers, economists and politicians shared a "manic culture" of denial, omnipotence and triumphalism as they threw caution to the wind, said Mark Stein, a scholar from the University of Leicester School of Management in the U.K.
Observing but not heeding warning signs from the Japanese economy's collapse in 1991 and the 1998 crisis in southeast Asia, the financial world in the West went into an over-drive of denial, escalating its risky and dangerous lending and insurance practices, he said.
Stein reports his work in the research journal Organization, in a paper entitled "A culture of mania: a psychoanalytic view of the incubation of the 2008 credit crisis."
The causes of the banking collapse that plunged many countries into recession have been well documented. But why did economists, financiers and politicians fail to anticipate it? Stein argues that the financial world had been suffering from collective mania for a good two decades. "Unless the manic nature of the response in the runup to 2008 is recognised, the same economic disaster could happen again," he warns.
He defines the "manic" culture in terms of four characteristics: denial, omnipotence, triumphalism and over-activity.
"A series of major ruptures in capitalist economies were observed and noted by those in positions of economic and political leadership in Western societies. These ruptures caused considerable anxiety among these leaders, but rather than heeding the lessons, they responded by manic, omnipotent and triumphant attempts to prove the superiority of their economies," he wrote.
"The massive increase in credit derivative deals, industrializing credit default swaps and the removal of regulatory safety checks, such as the repeal in the United States of the landmark Glass-Steagall banking controls, were a manic response to the financial crises within capitalism," he added.
As a credit crunch loomed, senior figures, such as Ben Bernanke, the then chairman of the U.S. Federal Reserve Bank, drew a sharp distinction between economies of the West and Japan. Bernanke's "great moderation" speech in 2004 claimed the avoidance of extremes made him "optimistic about the future," Stein noted. Weeks before the collapse of Lehman Brothers in 2008, Bernanke claimed that the scenarios that befell Japan and south-east Asia could be avoided in the West.
Stein claims this behavior was also strengthened by "triumphant" feelings in the West over the collapse of communism.
"Witnessing the collapse of communism, those in power in the West developed the deluded idea that capitalist economies would do best if they eschew any resemblance to those communist economies, thereby justifying unfettered financial liberalization and the destruction of the regulatory apparatuses of capitalism. The consequences of this manic response have been catastrophic, with the on-going eurozone crisis being-in many ways-a result of this," he said.
"Whether one examines the actions of banks and hedge funds, or the limitations of ratings agencies, auditors, regulators and governments, a more worrying and deeper question emerges concerning why so many parties, more or less simultaneously, were implicated in such unprecedented and extreme risk-taking."
Source: WorldScience
http://www.world-science.net/othernews/120606_creditcrisis
http://www.world-science.net/othernews/120606_creditcrisis
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Robert Karl Stonjek
Robert Karl Stonjek
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