Behavioral Economics

Mind Over Money

PBS Nova (2010)

Film Review

Mind Over Money is an intriguing Nova documentary about the new field of behavioral economics. At present, banks and governments use complex mathematical models in making decisions about lending, investment, taxation and government borrowing. These models are based on the premise Adam Smith put forward in Wealth of Nations that the “rational self-interest” of groups of individuals causes economic markets to be perfectly self-regulating without government regulation or control.

While the economic “rationalists” who subscribe to this belief acknowledge that not everyone makes totally rational decisions about money, they claim enough do to enable bankers, governments and economists to 1) predict the behavior of markets mathematically and 2) guarantee the overall stability of markets without government interference.

In contrast, behavioral economists argue that most decisions around money are based on emotional and unconscious factors. They further argue that without government regulation, waves of irrationally sweep through the stock market and mercantile exchange (where commodities are traded), causing destructive speculative bubbles and crashes as they did in in 1929 and 2008.

John Maynard Keynes was the first economist (during the Great Depression) to raise concerns that destructive booms and busts result from irrational investing behavior. Because he could offer no clear explanation why this was happening, his views were largely dismissed.

Economist Robert Shiller echoed Keynes concerns in his 2005 book Irrational Exuberance, in which he predicted the 2008 global economic crash.

Thanks to a pressing need to understand the 2008 downturn (and prevent another one), social psychology research into spending and investing behavior is enjoying its own boom. The documentary describes a number of fascinating experiments that validate Keynes’s original claim that these decisions are largely controlled by emotional and unconscious factors.

For my own part, I question why we need to produce absolutely scientific certainty for something that’s blatantly obvious. In contrast to economists, Wall Street traders all readily agree that Wall Street volatility is driven by waves of emotion. It strikes me that Wall Street economists refuse to accept the behavioral basis of market activity because they have a vested interest in continuing the high priesthood of complex mathematical models.

The film implies that more market regulation is needed to prevent this type of market volatility. I disagree. In my mind, the best way to strip Wall Street of this vested interest is to strip banks of the power to create money out of thin air and restore money creation to public control (as Andrew Johnson and Abraham Lincoln attempted to do.) See An IMF Proposal to Ban Banks from Creating Money

 

Ayn Rand, Alan Greenapan and the 2008 Crash

I’ve just discovered another exciting series of documentaries by Adam Curtis

All Watched Over By Machines of Loving Grace*

Adam Curtis

BBC (2011)

Part I

Film Review

Despite its deceptive title, this BBC documentary is about Ayn Rand and her immense influence over Silicon Valley and Rand devotee Alan Greenspan.

Prior to seeing the film, I had no idea about the cult following Rand inspired in the computer geniuses who flocked to Silicon Valley in the late sixties. Believing they could create a new kind of democracy by combining Rand’s radical individualism with computer technology, they set up Ayn Rand reading groups and named their children after her. They were convinced that linking computers in vast self-regulated networks would do away with the need for politicians and authoritarian hierarchies. However instead of decentralizing power, as they envisioned, the computer revolution only further concentrated the power of wealthy elites.

Rand called her underlying philosophy “objectivism” and disseminated it through her novels and a close-knit group of devotees. It was a philosophy of selfishness. She believed it was in the best interest of humanity for everyone to pursue their own rational self interest, unimpeded by religion or morality. She maintained that altruism was especially destructive, as it interfered with happiness and freedom.

Rand Devotee Alan Greenspan

Former Federal Reserve chair Alan Greenspan was an early member of Rand’s Collective, the small select group that met weekly to hear chapters of her newest novel. He married a fellow Collective member and remained fiercely loyal to Rand even after her sexual jealousy broke up the group.

After cunningly convincing one of her strongest supporters to follow his own self-interest by having an affair with her, she somehow persuaded his wife (also a Collective member) to commit the sin of altruism by agreeing to it. When he continued to follow his own self interest by becoming romantically involved with a younger woman, Rand brutally attacked him (verbally and physically) and ordered him out of the Collective.

The Most Powerful Man in the World

After becoming Federal Reserve chairman in 1987, Greenspan became the most powerful man in the world.** In 1993, he somehow persuade the newly elected Bill Clinton to cut taxes instead of restoring the social programs Reagan and Bush had cut (as he promised during his campaign). Greenpan argued this would cause markets to boom, enabling Clinton to repay the sizable federal debt he inherited from Reagan and Bush.

So Clinton cut social programs even further. Markets boomed, as Greenspan predicted, but not because of tax cuts. The real cause was an enormous credit bubble by massive Wall Street lending to unstable Southeast Asian markets. All the Wall Street banks erroneously believed that feedback loops in their computer networks would protect them by allowing them to hedge (bet against) their risky loans.

Greenspan Recognizes His Error

By 1996, even Greenspan could see that productivity wasn’t increasing despite the massive increase in profits. He tried to warn Congress that stocks were overvalued in his December 1996 “rational exuberance” speech.*** The corporate media crucified him and he recanted, acknowledging that computers might be increasing productivity he ways he couldn’t decipher.

Robert Rubin Launches Indonesian Coup

The credit bubble Wall Street created in Southeast Asia led Thailand, Malaysia, South Korea and Indonesia built thousands of homes and commercial buildings that couldn’t be sold. In 1997, the bubble burst. Clinton, who was busy being impeached over Monica Lewinsky, was powerless to act. He allowed his Treasury Secretary, former Goldman Sachs executive Robert Rubin, to take over his Southeast Asia policy. Rubin, in turn, organized an attempted coup against Indonesian president Suharto for refusing to accept an IMF bailout.

Faced with massive civil unrest, Suharto eventually accepted the bailout and the structural adjustment conditions the IMF imposed (massive cuts in government spending on food subsidies and other social services, throwing millions of people out of worked). As typically happens, the IMF bailouts went to pay off the Wall Street banks. While the IMF-imposed austerity cuts (helped along by currency trader George Soros) led the currencies of all four countries to collapse. Residents of Thailand, Malaysia, South Korea and Indonesia were plunged into abject poverty comparable to the Great Depression of the 1930s.

China Escapes from Wall Street Domination

The most important outgrowth of the 1997-98 Southeast Asia economic crisis was a major shift in Chinese economic policy. Determined to remove themselves from Wall Street domination, China’s leaders devalued their currency, flooded the US with cheap consumer goods and used their profits to finance growing US indebtedness by buying US Treasury bonds.

In the mean time, Greenspan cut interest rates to near zero percent and the US was flooded with trillions of dollars of cheap (borrowed) money. Wall Street, in turn, recycled these funds as subprime loans to the third world population in American ghettos.

Again believing computers would keep them safe, Wall Street banks created the largest credit bubble in history. When it burst in 2008 Wall Street, as usual, got bailed out. This time Americans paid for the bailout, as they were plunged into widereaching soul-crunching misery.

The documentary features fascinating archival interviews with Rand and members of her Collective.


* Title of 1967 monograph distributed free by California cybernetics enthusiast Richard Brautigan. Available for $400 from Abe Books

**On reflection, it seems a great pity Rand didn’t have the affair with Greenspan. We could have been spared the 2008 economic crash.

***”How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”