Sunday, April 11, 2010

The Tyranny of Financial Technicians (and its demise)

The people always have some champion whom they set over them and nurse into greatness. This and no other is the root from which a tyrant springs; when he first appears he is a protector. Plato - The Republic

One of the earliest civilizations of which we still have record, Ancient Egypt, was, in a sense, run as a Technocracy (rule by technical experts). Technicians of that period were revered as priests and studied not money or credit, but time. Their worship of the sun set them apart from other cultures which used the more frequent lunar cycles to track time. By tracking the sun's movement in the sky the priest-technician forecast the coming of the Nile flood on which Egyptian food production was based.

These days the reverence accorded the ancient priests of time seems silly. Children with a few years of school can explain how the earth's revolution around the sun, and the earth's axial tilt leads to seasonal change. The basic secrets of the temple of time can be known by any who wish.

In modern times, the secrets of the temple of money, however, despite demystification attempts by William Greider, et alios, are still considered secret. Financial Technicians are revered perhaps as much as were the Time Technicians of old. Just as the Pharaohs of Egypt thought twice about confronting his priests our rulers think twice about confronting ours.

The Passover season just passed commemorates, from one perspective, the freedom gained from the ancient technocracy of Egypt, who, in the story, weren't as prescient in their forecasting as they professed. In that light, the timing of this op-ed, taking a modern technocrat to task for his lack of prescience, was perfect.

In modern times, internet connectivity makes the secrets of the temple of money far more open than was the case in ancient times. The big secret of the temple of money is that there is no secret. Men like Blankfein, Paulson, Rubin, Dimon, Greenspan, Bernanke, and (perhaps especially) Geithner, are not possessed of intellect and wisdom not found in many thousands of others. Moreover, their judgments, even granting solid "market sense" might be detrimental to the people and corporations that make up the nation (and whose actions are the ultimate determinants of the market).

Louis Brandeis, in his Other People's Money: and how the bankers use it, speaks to this issue:  Prominent in the banker-director mind is always this thought: "What will be the probable effect of our action upon the market value of the company's stock and bonds, or indeed, generally upon stock exchange values?" The stock market is so much a part of the investment-banker's life, that he cannot help being affected by this consideration, however disinterested he may be. The stock market is sensitive. Facts are often misinterpreted "by the street" or by investors. And with the best of intentions, directors susceptible to such influences are led to unwise decisions in the effort to prevent misinterpretations. Thus, expenditures necessary for maintenance, or for the ultimate good of a property are often deferred by banker-directors, because of the belief that the making of them now would (by showing smaller net earnings), create a bad, and even false impression on the market. Dividends are paid which should not be, because of the effect which it is believed reduction or suspension would have upon the market value of the company's securities. To exercise a sound judgment in the affairs of business is, at best, a delicate operation. And no man can successfully perform that function whose mind is diverted, however, innocently, from the study of, "what is best in the long run for the company of which I am director?"

Like the Ancient Egyptians waiting for the flood, a critical mass of modern people, many of whom dream of a comfortable retirement, are willing to revere those who promise market prices supportive of their financial expectations, and ignore those who don't. The market concerns of the investment banker described by Brandeis have increasingly became a major factor on policy.

As one example, consider the changed IMF perspective of capital flows (and its analog in the 2008-09 US Financial Rescue package) detailed by Raymond Mikesell, who attended the Bretton Woods Conference: Both White and Keynes believed that the IMF's assistance to members should not finance capital flight. However, the IMF has not maintained this position. The IMF's loans in response to the financial crises in the East Asian countries during the 1990s were primarily for the purpose of helping members restore confidence in their securities markets and currencies, rather than for financing imports. Moreover, according to a recent statement by Secretary of the Treasury Lawrence E. Summers, emergency loans to countries facing currency crises should be the principal lending function of the IMF (Kahn 1999).

Ultimately the Tyranny of Financial Technicians is the Tyranny of the Markets. Admittedly, I've employed hyperbole to make my point. The object of people's fascination varies over time. Following WWII, the people revered war heroes and elected Eisenhower and Kennedy. Their Treasury Secretaries did not come from Wall St. (or even close) and finance was but one of many technical skills deemed useful, and not the most popular.

In all likelihood, the modern fascination with our Technocracy will fade when the promises are seen to be empty. And empty they will prove to be so long as finance is primarily concerned with the markets and not the real sector on which they are based.

** Late addition:  In further support of the Investment-Banking mind driving policy thesis, consider the following argument in favor of EU and IMF support for Greece, granted at below market rates:  Jean-Claude Juncker, the Luxembourg prime minister and eurogroup president, said he hoped the agreement would calm the markets and help to avert the crisis facing Greece and the single currency. "This is the step of clarification the markets are waiting for," he said. "It shows there is money behind this."


robdashu said...

sheep, sheep, sheep.

We're all sheep now...

Doesn't matter what you believe, it's the ideas coursing through the lemmings that matter.