Freud puts capitalism on the couch

A fascinating article has been written by Eliot Spitzer for The Slate which details the massive lying that went on during the GFC. It raises an intriguing question. What functions do lying and truthfulness play in financial systems? The assumption commonly made is that lying and deception are “bad” and truth telling is “good”. This is certainly true in a personal moral sense (with qualifications), but I do not think it readily translates into the corollary — that lying is a social “bad” and truth telling is a social “good”. Especially when it comes to dealing with finance. Various forms of deception are so common in finance that they cannot be separated out. Yet at the same time the system relies utterly on trust. It is that contradiction that needs to be understood, and it is by no means a simple matter.

Spitzer starts his critique by personalising the banks’ deception, a telling way of conveying moral outrage. Except, of course, banks are not people:

Imagine you walked into a bank, applied for a personal line of credit, and filled out all the paperwork claiming to have no debts and an income of $200,000 per year. The bank, based on these representations, extended you the line of credit. Then, three years later, after fighting disclosure all the way, you were forced by a court to tell the truth: At the time you made the statements to the bank, you actually were unemployed, you had a $1 million mortgage on your house on which you had failed to make payments for six months, and you hadn’t paid even the minimum on your credit-card bills for three months. Do you think the bank would just say: Never mind, don’t worry about it? Of course not. Whether or not you had paid back the personal line of credit, three FBI agents would be at your door within hours.

Yet this is exactly what the major American banks have done to the public. During the deepest, darkest period of the financial cataclysm, the CEOs of major banks maintained in statements to the public, to the market at large, and to their own shareholders that the banks were in good financial shape, didn’t want to take TARP funds, and that the regulatory framework governing our banking system should not be altered. Trust us, they said. Yet, unknown to the public and the Congress, these same banks had been borrowing massive amounts from the government to remain afloat. The total numbers are staggering: $7.7 trillion of credit—one-half of the GDP of the entire nation. $460 billion was lent to J.P. Morgan, Bank of America, Citibank, Wells Fargo, Goldman Sachs, and Morgan Stanley alone—without anybody other than a few select officials at the Fed and the Treasury knowing. This was perhaps the single most massive allocation of capital from public to private hands in our history, and nobody was told. This was not TARP: This was secret Fed lending. And although it has since been repaid, it is clear why the banks didn’t want us to know about it: They didn’t want to admit the magnitude of their financial distress.

Due to some excellent research by Bloomberg journalists  — yes, real journalism remains as achievable as it ever was, the MSM need not be asleep — a pattern of wholesale deception has emerged. There is a secret government, in effect, that is bought and sold by Wall Street. No surprise there, or that democracy has been undermined. It is a common enough pattern for wealth to co-opt power: I cite the entire history of modern civilisation as demonstration. The real miracle is that democracy can occur at all, that the powerful and wealthy can be subjected to constraints.

The truth is that finance is always based on, if not outright lies, at least various shades of deceptiveness. Because the future is unknowable, it is inevitable that the basis of future transactions will always be biased towards whatever suits the players or traders. They will lie about the future; it is only when they lie about the present that they may contravene the law. Such lies about the future are really an integral part of doing business. Without it, a lot of business would not be possible.  Yet as I say, the system itself is based on trust, hence words like provident, mutual, shares, bankers’ trust abound.  This is not a simple matter and it cannot be understood with reference to personal morality.

The neo-liberal view is that free markets are better because they tame our wicked natures. As Keynes said, capitalism is the astounding belief that the most of wickedest of men will do the most wickedest of things for the greatest good of everyone. And of course that wickedness includes lying. The “belief” is often traced to Adam Smith, who, conveniently, was a Scottish moral philosopher, giving the whole thing a comforting gloss.  But Slavosj Zizek traces it to Kant:

“The paradigm here, in many ways, is the way that the market operates: human nature is egotistic and there is no way to change it, so what is needed is a mechanism that would make private vices work for common good. In his famous essay on “Perpetual Peace,” Immanuel Kant provided a precise formulation of this key mechanism:

Many say a republic would have to be a nation of angels, because men with their selfish inclinations are not capable of a constitution of such sublime form. But precisely with these inclinations nature comes to the aid of the general will established on reason, which is revered even though impotent in practice. Thus it is only a question of a good organization of the state (which does lie in man’s power), whereby the powers of each selfish inclination are so arranged in opposition that one moderates or destroys the ruinous effect of the other. The consequence for reason is the same as if none of them existed, and man is forced to be a good citizen even if not a morally good person.

The problem of organizing a state, however hard it may seem, can be solved even for a race of devils, if only they are intelligent. The problem is: ‘Given a multitude of rational beings requiring universal laws for their preservation, but each of whom is secretly inclined to exempt himself from them, to establish a constitution in such a way that, although their private intentions conflict, they check each other, with the result that their public conduct is the same as if they had no such intentions.’

A problem like this must be capable of solution; it does not require that we know how to attain the moral improvement of men but only that we should know the mechanism of nature in order to use it on men, organizing the conflict of the hostile intentions present in a people in such a way that they must compel themselves to submit to coercive laws. Thus a state of peace is established in which laws have force.

One should follow Kant’s line of thought to its conclusion: a fully self-conscious liberal should intentionally limit his altruistic readiness to sacrifice his own good for the good of others, aware that the most efficient way to act for the common good is to follow his private egotism. Here we have the logical obverse of the motto “private vices, public benefits” – namely, “private goodness, public disaster.”

There is in liberalism, from its very beginning, a tension between individual freedom and the objective mechanisms which regulate the behaviour of a crowd, as was already observed by Benjamin Constant who clearly formulated this tension: everything is moral in individuals, but everything is physical in crowds; everybody is free as individual, but a cog in a machine in a crowd.

The inner tension of this project is discernible in two aspects of liberalism: market liberalism and political liberalism. As Jean-Claude Michea has brilliantly argued, these two aspects of liberalism are linked to two political meanings of “Right”: the political Right insists on market economy, the politically-correct Left insists on the defence of human rights – often its sole remaining raison d’etre.”

It is a well made point and, as Zizek points out, leaves no place for what George Orwell described as “common decency”. Wall Street has no place for such frippery.

Once again, however, we are using binary analytics that leave us with as much confusion as light (Zizek is a Hegelian, using binary dialectics).

I want to propose a different way of looking at the problem of lying and truth, barbaric natures versus controllable systems. Think of Freud’s three sided model of mind: the Id, the ego and the superego. If we apply it to finance I think we get closer to how we should look at things.

The id, which is the unconscious, that of which we are unaware, is, in financial systems, trust. It is our unacknowledged social natures, the inter-dependence on which we depend. It is the simple fact that without a basic level of trust there can be no transactions — we see the graphic failure of trust in the  freezing of the inter-bank lending system in the GFC and increasingly, now.

The ego is the unalloyed self interest described by Keynes and Kant. It is ugly, the Ayn Rand world of remorseless self interest. It is not redeemable, even if it is understandable and to a large extent necessary. It is certainly inevitable.

The super ego is the world of morality used by Spitzer. It is what the regulators should, and aren’t doing.

If we look at it this way, we can get some way out of the confusing contradictions of finance. For instance, the ground of the system is not the self interest of egos, it is the need for trust and co-operation of the id that is the glue of any social system, even the global system we now have. The ego is essential and is where most of the conscious action occurs, including all that lying and deception. It is necessary and should be seen as such. But it needs to be constrained by the super ego — you know, moral stuff. Sadly, the super ego, government, has abrogated its responsibilities and its ability to say: “stop it”. But there is always hope.

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  1. ELIOT SPITZER presuming to lecture others on honesty and moral probity….?????

    “As Keynes said, capitalism is the astounding belief that the most of wickedest of men will do the most wickedest of things for the greatest good of everyone. And of course that wickedness includes lying. The “belief” is often traced to Adam Smith, who, conveniently, was a Scottish moral philosopher, giving the whole thing a comforting gloss.”

    You set up a straw man “Adam Smith” who said no such thing as what Keynes did, or your interpretation of it. There is a strong connection between the morality of a culture, and what “the free market” will do. You are right that Adam Smith was a moral philosopher.

    Here is an interesting excerpt from “Being Indian”, by Pavan K. Varma: what would be the result of “free market” policies in a Hindu culture?

    “…….Their spiritualism, although lofty in its metaphysics, is in religious practice mostly a means to harness divine support for power
    and pelf…….Most Indians are ‘other-wordly’ only in their indifference to anything in the external mileu that is not of direct benefit to their immediate and personal world.
    This complete self-absorption is truly evident in their remarkable tolerance of inequity, filth and human suffering. They are a pragmatic people, naturally amoral in their outlook. There is no notion of ultimate sin in Hinduism. Any action is justified in certain contexts,
    and ‘gods’ are routinely bribed. Corruption has grown endemically
    because it is not really considered wrong, so long as it yields the
    desired result. If discovered, it provokes great moral outrage, in
    inverse proportion to the degree to which it is accepted. The concept of
    morality, and of high-minded principle, is dear to Indians as a theoretical construct, but largely ignored in real life as impractical…….”

    “The True Believers” by V S Naipaul, contains a similar discussion of Islam, which reveals why free markets (and even democracy) will never work for long in that culture.

  2. From Melanie Phillips: “The Culture War For The White House”; in “The Spectator”
    Oct 17, 2008;

    “…..I see this financial breakdown, moreover, as being not merely a moral crisis but the monetary expression of the broader degradation of our values – the erosion of duty and responsibility to others in favour of instant gratification, unlimited demands repackaged as ‘rights’ and the loss of self-discipline. And the root cause of that erosion is ‘militant atheism’ which, in junking religion, has destroyed our sense of anything beyond our material selves and the here and now and, through such hyper-individualism, paved the way for the onslaught on bedrock moral values expressed through such things as family breakdown and mass fatherlessness, educational collapse, widespread incivility, unprecedented levels of near psychopathic violent crime, epidemic drunkenness and drug abuse, the repudiation of all authority, the moral inversion of victim culture, the destruction of truth and objectivity and a corresponding rise in credulousness in the face of lies and propaganda — and intimidation and bullying to drive this agenda into public policy.
    The financial crisis was brought about essentially by a public which threw away all notions of prudence and committed itself to spending today what it could never afford to pay back tomorrow, and a banking, regulatory and political sector which ruthlessly and cynically exploited and encouraged such catastrophic irresponsibility with a criminal disregard of the ruinous consequences for the poor. The financial crisis and our social meltdown are thus combining to form a perfect cultural storm…..”

    From David P. Goldman: “Benedict XVI is Magnificently Right”; in the “Asia Times”;
    Dec 9, 2008

    The concluding paragraphs:

    “…..If moral rot has taken hold of a society, the market mechanism will take it to hell faster and more efficiently than any of the alternatives.

    There is an even greater flaw in the theory of the free market, perhaps, and that is in the assertion that the market can form adequate expectations about the future profitability of firms and make proper judgments about allocation of capital. How do we explain away the misallocation of capital to Internet stocks during the late 1990s and to homes in the United States (and elsewhere) during the ensuing years?

    The world simply is too uncertain for the market to look more than a year or two over the horizon. Technological and social change occurs in unexpected and dramatic ways, frustrating the best guesses of the cleverest entrepreneurs, not to mention the stodgy decisions of central planners. The market cannot form accurate long-term expectations; at best it can imagine future outcomes. The quality of its imagination in this case depends on cultural factors that transcend economic judgment.

    Americans spent the 1990s in a fantasy world, where technological change supposedly would transform the human condition, taking as their intellectual guide science-fiction writers like William Gibson. There was nothing wrong with the market mechanism as such; what went haywire was the childish imaginings of the American public.

    The future pope’s 1985 paper insists that it is mere moralizing, not morality, to dismiss what economics has learned about the market mechanism. But economics cannot find a remedy for the imagination of an evil heart, or a foolish one, for that matter. Ethics founded on religion are the precondition for long-term economic success, if for no other reason than economies depend on family formation. If the present economic crisis helps the West to reflect on its moral weakness, the cost well may be worth it.”

    • “And the root cause of that erosion is ‘militant atheism’ which, in junking religion, has destroyed our sense of anything beyond our material selves”

      Atheism does not mean lack of Morality, in many ways it means a higher level and greater commitment as per Maslow.

        • For the individual, perhaps. I have no problem with the cultural-political-economic-ethical intuitions of atheists like Keith Windschuttle, Theodore Dalrymple, and Charles Murray. But this is definitely not the case for “the herd”. In fact, the rare ethical atheists spend most of their careers raging against the irrationalities of the now irreligious herd, on matters such as CAGW, social breakdown, crime and the family, economic policy, Israel, education, and so on.
          Even Hayek made some very interesting observations about the compatibility of Protestanism and “submission to impersonal forces”, that actually led to superior outcomes (i.e. via “the free maket”) to those resulting from a belief in a “planned” earthly utopia.

  3. Note that?

    “…..There was nothing wrong with the market mechanism as such; what went haywire was the childish imaginings of the American public….”

    Like, “everyone knows house prices can never fall”. It doesn’t matter if median multiples have trended historically around 3.0; if they are 5.0, we expect they will be 6.0 next year. If they are 7.0, we expect they will be 8.0 next year. If they are 9.0, we expect they will be 10.0 next year.

    A MORAL society would have done something about the injustice to first home buyers long since.

    The only people with any rational faculty left, were shorting this nonsense, and everyone thought they were crazy. There was no lack of takers for the “long” end of the transaction.

    And just when you thought no-one could be so crazy again, Australians have spent the years SINCE 2007 believing “we are different…..OUR houses are not over-priced at all….OUR ‘fundamentals’ are sound, the Americans weren’t….” (Like, there is any fundamental that matters more than the median multiple, and the relationship between house prices and INCOMES….?)

    So are the Australian financial institutions going to manage this better than the American ones? I find it hard to believe that there will not be an underlying tendency to not bother about honesty too much, because “guaranteed forever-rising property prices are the only insurance we need against ANYTHING….” Plus of course, we HAVE “insurance” in the form of derivatives that make our mortgage portfolios cast-iron secure – never mind the Captain of the Titanic nature of that insurance – the “insurers” believe just as much as anyone, that they are insuring against an event that will NEVER happen…….

    • ” (Like, there is any fundamental that matters more than the median multiple, and the relationship between house prices and INCOMES….?)”

      If the median multiple matters more than any other fundamental then Australia may be fine. That multiple has changed little in the last 8 years.
      I expected a crash in 2003 in Australia. But the 2003/4 price/income multiple was clearly sustainable. It has been sustained.

  4. V good stuff PhilBest (are you related to PhilBetter?). I have long wondered why we argue about the validity of THE MARKET, when THE MARKET has been with us for thousands of years. What we bring to the market, or how we frame markets, or the prominence that we give markets, is surely what maters, not markets themselves. We do live in hyper materialist times, scientific and financial, and there is some kind of moral failure occurring. But I wonder about these formulations of better times gone past, when people were more moral. Think back to the Borgias, when a lot of the financial frameworks were being formed. No great morality there.
    Read Savanorola on the bonfire of the vanities, for instance.
    I should say in my defence (although one should never defend oneself on blogs; it is contrary to the zeitgeist) that I wasn’t really setting up Adam Smith at all, straw man or otherwise. I was talking about the way his icon is used to defend self interest, the invisible hand etc. He has become a shorthand amongst IPA types for that position.

  5. PhilBest,

    A strong sense of morality (particularly concern for others welfare, or selflessness) definitely is a big positive for the long-term viability of free markets.

    However, don’t discount pure ponzi dynamics. Regardless of the level of moral decay, in my estimation ponzi systems do not depend on a low level of morality. They are somewhat indepedent beasts in their own right. It is the symptom of group social herding and requires emotions to take precedence over rationality (something that is still extremely common today). Such ponzi systems also require a certain level of ignorance within the herd. These three ingredients together – ignorance, emotions being more dominant that rationality and group social herding – and I believe you will get a ponzi bubble regardless of the level of moral degradation. If anything, the degree of moral degradation may perhaps affect the size the ponzi grows to, but that’s about it, in my estimation.

    History is also replete with resurgency of the “morality push” in times of economic hardship, and they usually end up going to some kind of whacky or destructive extreme of their own. One needs to be careful how about how strongly one thumps the morality table in times like these. You can’t force morality, it’s a choice. Even pushing people towards being more moral runs a good chance of fostering the development of a counterfeit form. The only true, lasting morality comes from the heart.


    • although i dislike disfunctional asset markets as much as the next person and am particularly irritated by govt policies that make them worse, i am not so sure it is helpful to pour venom on those who participate in those markets.

      Following the herd is a sensible thing to do in most cases and very natural.

      Watching what the herd has done successfully helps avoid wasting time trying bad restaurants, working for dud employers and measuring sea temperatures. See what works and do that is pretty good advice most of the time.

      Of course if you have the time or inclination to do all the primary research first hand you may be in a better position when the herd gets it wrong but that is a lot of work unless it is as interesting as reading MB

      Plus even when you do the work and can see the herd heading for a cliff you need to remember that govt will usually bend over backwards to protect the herd by socialising the costs incurred by the herd.

      Most people, ‘the herd’, would say that is reasonable as most people could easily see themselves in that herd.

      Thus i am not sure that morality is really the issue.

      People thought that debt was now much safer because we had lots of smart people in government and private institutions telling us it was.

      Just because you think you might increase your wealth by following that advice doesnt make you immoral.

      There were plenty of people questioning the advice, often from deep reservations about debt and living on credit, and while they have been proved correct sainthood is not warranted.

      A mistake was made – credit and debt without sufficient limits makes herd behaviour a lot more dangerous than normal.

      Lets fix it and learn from it.

      Pay your debts if you can or default and wear the consequences.

      • Clarky, the reference to pouring venom was not a reference to your comment more the general and understandable desire to criticise those who bit off more debt than they could chew.

        I agree with your comment that morality may not have much to do with the herd behaviour behind the GFC.

        • Thanks for clarifying Pfh. I must confess I had trouble working out how you could interpret what I was saying the way you seemed to…

          For the record, I wasn’t intending to pour venom on the herd. It was my attempt at a dispassionate “10,000 feet” view of what I think the mechanisms going on are.

          Part of the getting of wisdom, in my view, is knowing when it’s smart to follow the herd and when it’s not.

          Analogies like restaurants aren’t very useful in this context, in my opinion. Emotions aren’t the key driver of someone’s restaurant choice, in my view. It’s a more direct result of whether or not the food tastes less shitty than the anything else in the area… that is a sensory response.

          I guess we can excuse the herd for being the herd if choose, but I’m not comfortable with that. Decisions can be passive (such as not to leave the herd). “I’m too busy to think for myself” or “I couldn’t be bothered taking the time to check things out for myself” rings hollow to me.

          Please don’t take these statements to mean that I have no compassion for people’s predicaments though. That’s a very different matter. One can have a view about a persons historical stupidity/ignorance or otherwise and still have compassion for them and be willing to lend a hand.

          • You make a very good point – of course the tulip bubble and the South Sea bubble occurred in a quite morally straight laced age. You are quite right about herd behavior. I have commented several times that this is really what under-lay the “ease of credit” in the US mortgage market – the fact that so many investors were chasing mortgage backed securities and the long side of derivative transactions. If the herd somehow came to think that natural disasters had ceased, disaster insurance underwriting would become too easy to get, too, and the next big disaster that happened would cause the same sort of systemic risk that occurred in 2007.

  6. “capitalism is the astounding belief that the most of wickedest of men will do the most wickedest of things for the greatest good of everyone”

    This is a misunderstanding of capitalism based on inappropriate reductionism. The “good of everyone” is an emergent phenomenon (in the complex adaptive system sense), and does not require wicked men to have altruistic tendencies, any more than intelligent people need to have intelligent neurons.

    Of course if everyone was wicked, capitalism would not work. Capitalism is more about cooperation than dog-eat-dog competition. The carpenter cooperates with the lumberjack, the ironmonger and the customer, while competing with other carpenters. He does this because it’s the best way for him to survive and prosper.

    At the same time, there are many wicked people, and for capitalism to work efficiently, these people must be restrained by the law.

    At present, companies and banks in particular have grown too large and have captured governments and regulators. This makes it futile for the people to demand more regulation, as any new regulation will be designed to benefit those in control and further entrench their power.

    I have no idea what if anything can turn this around, but feeding the beast by allowing government to grow is not the answer. Personally I hope for the opposite.

    • “feeding the beast by allowing government to grow is not the answer.” (Paul Andrews)

      “for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” (Winston Churchill)

    • <b.Capitalism is more about cooperation than dog-eat-dog competition. The carpenter cooperates with the lumberjack, the ironmonger and the customer, while competing with other carpenters. He does this because it’s the best way for him to survive and prosper


      Capitalism has never been about cooperation, in fact cooperation has been more akin to centralised statist/nationalist economies.

      Capitalism strives to allocate capital the most effectively, and this will adjust according to present and future perceptions of productivity.

      The caprenter will only cooperate with the lumberjack while it is their best interests. If the labour could be outsourced to a non-income receiving device of greater cost/benefit output, allowing the carpenter to receive 100% of the gain of the productivity boost, all cooperation with the lumberjack would cease immediately.

      A carpenter would also fund such research in complete obscurity to the lumberjack.

  7. An interesting way of framing the issues SoN. To me the complexity of the outcomes from the actions of the finance industry obscure the banality of the cause.

    Institutions that had won loyalty and trust through consistent and reliable behavior were captured and that goodwill was used to make a quick buck. By the time those relying on the institution become aware of the loss of good faith it’s too late and from there the institution dies or is has its reputatiion repaired.

    It had been a longish cycle for the finance industry this time so the good faith was probably higher and also the potential to capture the central banks was a new twist.

    In this way the problem sits on top of a complex philosophical analysis about the role morality under the rule of law and is just another variant on petty fraud based on reputation.

    The Storm Financial example is a good case in point where the reputation of the institutions involved was a critical aspect of the failure. Similarly with housing leverage the legacy reputations of the institutions providing the capital for the leveraged bets was an important factor in convincing individuals that the risks were acceptable.

  8. Can this situation really be analysed from the perspective of an objective third party?

    It is easy to direct the scrutiny to the markets, banks, government institutions and media. I agree with the OP that it gets murky when we take a good look at ourselves and our roles in it all.

    The collective “we” as market participants wanted to believe in wealth without work. Sure, there were predatory practices, deception and fraud involved. But those things will not fully explain what happened. As a society, we bought the lies willingly – perhaps even demanded them. And we still demand the lies when it comes to house prices “never falls significantly”.

    Greed cannot be regulated. Yet, greed has a price. Sometimes it is the next market participant that pay in a market bubble or ponzi scheme. Sometimes it is society as a whole that pays; now or in a future public liablity.

    It is sad to see society sacrificing future prosperity for economic gain today. Perhaps this is also reflected in the industrialised world having below replacement birth rates. Is anything new? There are ancient texts describing the practice of child sacrifice rituals to ensure bountiful harvests of the day.

  9. The concept of individual recognition of “Lying and truthfulness in financial systems” is by no means a new phenomenon. I recall 30 years ago a senior officer of one of the Big 4 refusing to personally sign-off on any deal done that used his bank’s Cayman Island facilities, as he belived that the construction of the deals was based soley on tax avoidance and as such, in his view, was ‘illelgal’; he didn’t want his paw prints on any subsequent scrutiny. Needles to say, he got moved away…And those were the innocent days of lying…