Are We "Rational" or Merely Adolescent?   (March 19, 2009)

Youthful exuberance or foolish risk-taking which ends badly? Ah, adolescence. Or is "taking it to the limit" just a rational gaming of the system?

Correspondent Scott D. offered these thought-provoking observations on the behavioral "age" of the players in U.S. financial markets--and beyond.

I was just reading Yves Smith's piece tonight on Naked Capitalism (On Traders Behaving Badly and Cognitive Bias) and toward the end of the piece, she discusses why there is not more outrage, why we allow our financiers to make such insane bets and foster the attitudes that incubate crises such as these.

I was reflecting on conversations I've had with a few European friends over the years, one from Montenegro once told me that "America is hitting her teenager years, watch to see if she crashes the car". Our country is indeed young when compared to Europe, our identity is still the conglomerate identity of the world and there isn't a way of defining "America" beyond traditions in different regions and of course the "can-do spirit".

Even more so, our nation is a late teenager, one who now needs to decide if it can mature and come together, or fracture ribs, skulls, houses, and lives in the collapse after the heyday. One thing I've noticed as I progress through my 20's (now 26) is that my extremes have become, well, less extreme. I don't drive nearly as fast, I don't have eating contests with my buddies, late nights (except Thursdays) are now a function of my 1 year-old rather than a poker game. In short, I don't push my system as hard.

Yves speaks of training traders to maximize profits, to take it to the limit and beyond. I can't help but think that this is the problem with many aspects of our society. Those who have found the limits of the system, whatever system it may be, who have spent their lives abusively using the very institutions off of which they thrive, have trained a generation of extremists. Everything we do is specialized, we push it 110% (whatever that means) and nothing short of success will do.

I am elated that the system is forcing us to take a step back for the current zeitgeist, opening up opportunities to take the middle path, to not run on extremes but instead to build a sustainable society centered on the rewarding return of hard work and due diligence. Here's hoping.

Thank you, Scott, for these insightful comments. When pondering the relative "age" of any society, I am reminded of Zhou Enlai, Premier of China in the Mao era, who when asked about the consequences of the French Revolution, is reputed to have told Henry Kissinger, "It's too early to say."

Now that's a long-term perspective--and a darned fine quip as well.

As noted here in the past, there are unmistakably adolescent characteristics in Americans' self-absorbed irresponsibility in the financial realm. Nobody had a gun to the skull of those buying houses and autos with no money down, and nobody forced anyone to withdraw their entire net worth from their house via a home equity line of credit.

And nobody forced any institution to join the Dark Side of the "shadow banking system" which dealt in obscure and impossible-to-price Dark Arts derivatives. It was all about greed and maximizing your share of the spoils.

We can discern the same "extract every dime you can" in the battle in the bankrupt city of Vallejo, CA, in which the public unions are fighting tooth and nail to retain what are obviously unaffordable pay/overtime scales and benefits. Never mind the pay and benefits were raised just a few years ago in a bout of short-sighted, bubble-economy largesse; "it's my right!"

And how about America's blithe willingness to borrow trillions of dollars from non-U.S. entities? Hey, why not? Well, there's the little matter of paying interest, which will soon crowd out all other government spending.

Correspondent M.G. offered these thoughts on California's dysfunctional reaction to the unpleasant reality of having to "live within its means":

California is in budget trouble again, no surprise. I think our handling of the budget is a good indication of what the country as a whole will do. Fiddle and come up with grandiose spending plans (we have our own global warming initiative, stem cell initiative, etc.) until they hit the wall. No compromise between parties, no big picture at the top. Spoiled citizens who think there are always more rich people to tax. No need for messy industry either. We're "knowledge workers, man!"
Is all this reflect a deep and abiding immaturity of American society, or is it just rational gaming of the system? In other words, if the city's coffers are overflowing for a few years, let's loot it. If some suckers are willing to buy shady derivatives, let's take their money and laugh all the way to our Hamptons mansions. If somebody's dumb enough to sign an adjustable-rate mortgage with toxic re-sets, let's rip them off for the huge fees and move on, after promising them they can re-finance to a fixed rate after we've blown town.

It can certainly be argued that this "taking it for all it's worth" is a "rational" response to a system perceived as wide open to looting. From this perspective, everyone who maximized their personal profits by looting, stealing, lying, conniving and commiting fraud did so as a rational player in a massive financial game.

Now that the game is being tightened up, then the opportunities to loot, cheat, lie and steal are narrowing.

If we assume all this behavior was merely a rational response to a system ripe for gaming, then we might reasonably assume the response to "game over" might also be equally rational: OK, that was fun, now let's get real and live within our means.

But that's not what we're seeing on a societal wide scale. We're seeing instead stupendous denial of responsibility and reality: let's just borrow trillions of dollars from somewhere, anywhere, so we don't have to suffer any consequences of the system we gamed blowing up.

Here in California, our far-sighted and wise political leaders have conjured up a scheme to avoid living within our means: let's sell bonds against future state lottery earnings!

Is this rational? It would be difficult to make a case for it as anything other than the desperate, adolescent flailings of people who refuse to accept responsibility. "That tree jumped out in front of me! It wasn't my fault! Just buy me another car and I'll be careful this time!"

Collectively, we as a nation are whining and begging, "just loan us another couple trillion until we get back on our feet. We promise we'll be more careful next bubble!" Only there won't be a next bubble. We have to pay our bills with cash from now on, or bring the nation to inevitable insolvency.

Was greed, fraud, lying, embezzlement and the debauchery of credit and leverage all rational? You can make that case, to be sure. But then you have to accept that the rational response to the implosion of the "game" is to tighten up, get real and live within our means. No matter how "rational" it might have seemed to exploit the game, it isn't rational to recklessly borrow trillions to avoid the consequences of the game ending.

In a perverse irony of democracy, California is asking its voters to approve a sales tax increase (already 8.5% in many counties), an increase in the state income tax (already 9.5%) and the absurd folly of borrowing billions against future lottery earnings. As I recall, it's the most vulnerable and least able to throw money away who play the lottery; and I'm supposed to support this adolescent gambit to avoid living within our means?

I refuse. The teenage years are over, and it's time to grow up. There isn't enough money for everyone and everything, and so difficult prioritizing and choices have to be made. It's called adulthood, and it may or may not be "rational," but it is certainly real.

Ms. Smith insightfully suggested that there may be cognitive biases at work in our seemingly ho-hum response to this grand-scale outright theft, fraud, looting and lying. But perhaps there may be an emotional reason for this silence, too--one called collective guilt. Maybe we as a nation can't in good conscience raise our voices in righteous outrage because that would be the most egregious hypocrisy possible. Too many of us played the game, too, just on a smaller scale, for our protests to sound like more than the tinny complaints not of the righteous but of sore losers.

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