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Intervention by Denise Caruso Read Intervention by Denise Caruso, Executive Director of the Hybrid Vigor Silver Award Winner, 2007 Independent Publisher Book Awards; Best Business Books 2007, Strategy+Business Magazine

archive for April, 2009

LET’S NOT CONFUSE FREE MARKETS WITH FREEDOM

by ~ April 28, 2009

Free markets and free political systems have grown intertwined, but they remain very distinct ideologies. To call what happens on the trading floor “free” in the same way we refer to human liberty is an egregious overloading of the word “free.” As we consider how to reinvent free-market systems, it’s critical to distinguish between free markets and freedom. We can retain civil liberties as we construct a vastly different, more responsible financial system.

Let Greedom Ring

Greed is at the heart of free-market capitalism. Unlike in polite social settings, where showing one’s greed is highly inappropriate, greed is a prized and cultivated trait in an economic context. In economic theory, greed drives the market while constraining fraud. The combination of greed and freedom is allegedly all that’s needed to keep the market in check. Even former Federal Reserve Chairman Alan Greenspan espoused this view—until recently. Frank Partnoy puts it best in the updated afterword of his re-released book, “F.I.A.S.C.O. Blood in the Water on Wall Street”:

I thought Greenspan’s laissez-faire zealotry clouded his judgment…. Greenspan even boasted that there was no need for rules prohibiting fraud, because the markets inevitably would discover it. According to Greenspan, market competition alone, without any regulation,was sufficient, because no one would do business with someone who had a reputation for engaging in fraud. (Partnoy, 257)

It should be obvious to everyone now that competing self-interest isn’t enough to thwart fraudulent behavior or to keep failures from turning into catastrophes. Greed mixes with instinctual social behaviors to yield unconscionable consequences. “Herd mentality” causes periodic stampede conditions in the market, forming “bubbles” that can only normalize by bursting. Greed makes investors ignore warning signs for a mere 12% interest. Greed makes bedfellows of competitors. Greed interferes with mechanisms (such as reputation) for developing stable trust, creating instead an environment of blind trust.

By analogy, Greedom is a nightclub where—in a dimly lit, deafening, and bacchanalian environment—style wins out over substance.

Freedom and Trust

In contrast, modern democratic societies are founded on ideals of civil liberties and seeped in language of a “social contract.” The goal is to balance self-interest with societal interest. In modern democracies, freedom isn’t anarchy; nor is it mob rule. A free society is one in which trust can emerge because the governing authority systematically condemns exploitation.

Democratic systems are far from perfect. But they do a much better job than financial markets at cultivating social trust. Let’s all agree that decisions about our financial and civil freedoms shouldn’t be left to the derivatives traders or investment bankers. A true “free market system” needs to move away from the sophomoric idealism of greed toward a system of participation, transparency, and trust.

TWO BOOKS YOU MUST READ

by ~ April 14, 2009

I was strolling through a bookstore recently and picked up two books that are quite different but equally significant.

The first is “F.I.A.S.C.O. Blood in the Water on Wall Street” by Frank Partnoy. For me, this book filled in all the gaps in coverage of the financial crisis. If you want to understand the financial crisis and at a deeper level, you need to pick up a copy of this book.

Partnoy originally published the book in 1997 and predicted the financial crisis would occur as a result of derivatives trading. I assume that sophisticated readers will find the book overly generalized, but that’s what makes the book accessible to a wide audience: Partnoy aptly describes the “rocket science” of derivatives in lay terms. For me, the book reveals the mechanisms in investment banking that aren’t spelled out in mainstream media. Here’s a quote from the Afterword:

Today, when I am asked if anyone saw this crisis coming … my answer is yes. We invented the products that ultimately blew up the banks. We created the instruments at the center of the subprime mortgage meltdown. We fostered a culture of epic greed, which nearly destroyed the financial system.  (Partnoy, 248)

The second book is “On Being Certain: Believing You Are Right Even When You’re Not” by Robert A Burton, M.D. The title says it all. It’s a topic I’ve broached several times on this blog (for example, here and here). The book is written for a general audience but provides summaries of experiments and cases that show the differences between the feeling of knowing and actually knowing. Here’s an excerpt from the beginning of the book:

Within one day of the space shuttle Challenger explosion, Ulric Neisser a psychologist studying flashbulb memories (the recall of highly dramatic events), asked his class of 106 students to write down exactly how they’d heard about the explosion, where they were, what they’d been doing, and how they felt. Two and a half years later, they were again interviewed. Twenty-five percent of the students’ subsequent accounts were strikingly different than their original journal entries. More than half of the people had lesser degrees of error, and less than ten percent had all the details correct…. What startled me about the Challenger study were the students’ responses when confronted with their conflicting accounts. Many expressed a high level of confidence that their false recollections were correct, despite being confronted with their handwritten journals.  (Burton, 10-11)

For anyone who has read these books, I’d love to hear your thoughts on them!

WE’RE FROM THE GOVERNMENT AND WE’RE HERE TO PERFORM SURGERY

by ~ April 14, 2009

It turns out there’s something scarier to hear than “We’re from the government, and we’re here to help.” Obama announced yesterday a surgical bankruptcy for GM. I assume surgical bankruptcies will be completed will the precision of surgical air strikes? Heaven help the auto industry!