Wednesday, April 29, 2009

The Road to Hell

Hell is full of good intentions or desires. Saint Bernard of Clairvaux

In a recent post at The Baseline Scenario, a blog by Simon Johnson I find most interesting- gotta love financial blogs that reference Baudrillard, I came across the following:

I don’t know Tim Geithner. But I have no reason to believe he is corrupt. Instead, the simplest explanation of the Times article is that he has internalized a worldview in which Wall Street is the central pillar of the American economy, the health of the economy depends on the health of a few major Wall Street banks, the importance of those banks justifies virtually any measures to protect them in their current form, large taxpayer subsidies to banks (and to bankers) are a necessary cost of those measures - and anyone who doesn’t understand these principles is a simple populist who just doesn’t understand the way the world really works.

In other words, according to the author, with whom I agree on this point, Mr. Geithner is well intentioned. Sadly, as St. Bernard, in more modern vernacular would say, "the road to hell is paved with good intentions."

Mr. Geithner suffers from a common phenomenon observed by William James who famously quipped, "most people think they are thinking when they are merely rearranging their prejudices."

Reasoning, or the generation and affirmation of propositions (perhaps induction would be more apt), differs from rationalizing, or the defense, explanation or excuse of an already accepted proposition. To paraphrase Mr. James, most people confuse rationalizing with reasoning in part because rationalizing and deductive reasoning- the type of reasoning most easily and thus often taught in schools- are often indistinguishable....until you wonder if the given propositions are, indeed, true.

Deduction, as the word implies, assumes the truth of given propositions and logically infers, or takes from them, other, non-contradictory propositions as in the classic- if you ever found yourself in a logic class, that is- all men are mortal, Socrates is a man, therefore Socrates is mortal.

Deducers tend to do well in school, and work well in institutions, like banking, where the given truths are not questioned. Inducers, like myself, who question tenets, do not work well in institutions. We wear pajamas all day and blog.

But, enough pedantry. The reason for the post was to suggest, assuming Mr. Geithner's prejudice is wrong, that we stand at the precipice of a Kuhnian revolution.

There are a great many people who believe propositions about political economy which, in my view, are not supported by the facts nor by theories of Capitalism itself, to wit, when did finance become exempt from creative destruction?, but as there are far fewer inducers than deducers, especially in long extant institutions, these propositions will not die easily.

The likelihood of a graceful resolution- say by putting most of insolvent Wall St. in receivership and granting more power in international finance to China, et. al.- to the current financial crisis has, in my view, became very small indeed. Substantial, discontinuous changes in financial prices are the fruit of non-graceful resolutions.

Hang on to your hats (and wallets).


Hombre said...

Two thoughts on this post:

1) Geithner might believe those things honestly, but there are plenty of people that could have been chosen for that spot -- and Obama/whoever decided to pick a guy who believes Wall Street is the center of the universe. Geithner's intentions might be pure, but what about his nominators?

2) I'm a bit confused by your discussion on inductive vs deductive reasoning. To me this failure of the modern financial system is partially a result of too many believers of inductive reasoning. "House prices never go down" (based upon data since WW2) and "AAA-rated securities are bulletproof" (based on data from the ratings agencies) seem like flaws of inductive reasoning to me, because they extrapolate out the past few decades into perpetuity. Those who saw past this seemed to me to be using deductive logic: "NINJA/alt-a/subprime mortgages are going to blow up even though there's no historical data to justify that conclusion" and "FNM/FRE/C are all going to be worthless as a result." What do you think?

Dude said...

1) I should have written a paragraph or two on St. Bernard's point- how self-interest blinds us to the often rather obvious consequences of our actions. In other words, I suspect much of the US power elite are well intentioned in the sense that they feel the US is better off run by them. Whether they are right is another issue.

2) My argument, obviously poorly articulated, is that there are too few people willing to question generally accepted truths- too few willing to check the inductions that gave rise to them- and too many Hoffer-type "true believers."

Induction both generates and affirms propositions. A good inducer, in my view, is as skeptical of his own propositions as any one else's. To wit, Einstein became quite skeptical of his induced General Theory of Relativity...but too many people had already gotten on that train. As he quipped, if I had known, I would have been a watch-maker.

Perhaps the true believer metaphor works better in this case....

p.s. propositions which claim no empirical justification are neither deductive nor inductive

Saladin said...

Greetings Fellow inducer. Just a curious question. You seem to have traveled further down the road-of life than I have at this point. And I would ask to borrow some of your perspective.

As the INTP type, I have the luck of a having a stable, secure, well paying job (that more or less rewards me for existing)e.g. I'm not flipping burgers which is the most likely career filed for INTPs that are unable to apply themselves. I take your comments seriously in this article and in paticular, these comments from the last
" It is vital, given our increasingly complex division of labor, that my work is productive. If it doesn't add to the cooperative effort I'm diluting the value of money- not just mine, but everyone else's.

Pause, if you will, and reflect on this idea a moment."

My question is: in your understanding does the unstable economic situation that we find ourselves in make the "leap of faith" to jump to a completely different area a better more opportune choice than to stay at my present secure but (in my view less productive) employment.

I fell into my present job as something to do until I figured out what I wanted to do when I "grew up". Twelve years since, I think I've grown up, but still haven't exactly figured out what to do (although I think I have narrowed down my choices enough to have a good idea)

I'm not financially independent, but debt free and have a big slug of metal ( the precious kind).

P.S. thanks for the 401K/IRA vs PM advice from a while back!

I'm eligible to "leap" in 2 years.

So, is that a "leap" you would take?

I'm really just worried about providing for the five of us during my course of study. I think we could do it, but in the same amount of time, I would be eligble to start collecting a pension from my current job.

That's the rub. Jump 6 years prior to pension eligbility and leave secure employment (I'm in the military) for a chance to do what I think will make the world a better place. Or, do I just bide my time with the safety net and then try to fix the world after my gov employment runs it's course.

(of course, I'm expecting high/hyper inflation during the next six years, so part of my dilema is the probabilistic determination of a likely outcome. )

My reasoning goes "why stay if pension and pay are likely to be devalued into insignificance" e.g "leap", vs "ummm, am I sure about the timing?" e.g. park your butt and don't jump ship.


Dude said...

These are weighty questions you ask- one beyond my ability to answer, except in a round-about way.

My brother-in-law recently asked me similar questions and I suggested he began reading about economics and finance. "If," I said, "you go on my word, you won't go strong for your faith will be but a reflection of my own. You must believe in what you do."

I can only wish you well and suggest that the fact that you are seeking is the best first step.

Saladin said...

Sage advice for such a Socratic reply.