November 3rd, 2008

Almost as intimidating as the 2008 Opening Ceremony

As my friends, please let me never get drunk and talk shit about anyone who’s ever played rugby in New Zealand, at any competitive level. I’m pretty sure he could rip my arms off.

October 16th, 2008

A few thoughts on the faith-based economy

Last week as I listened, along with many other Americans and others around the world, to President Bush’s most recent effort to reassure us about the current economic meltdown I had a “Road to Damascus” moment. It happened as I heard Bush repeat the word “faith”: faith in America’s institutions, faith in its workers, faith in capitalism, faith in our capacity to survive other disasters (such as 1929 and 2001). And, of course, the faith we needed to weather the recent crisis and get to the other side, such faith, in Bush’s rhetoric, being not only the need of the moment but the fulcrum for the journey to recovery.

I instantly saw that a great feat in reverse discourse engineering had occurred: we had moved into the era of the “Faith-Based Economy.” Many of us had already developed a certain worry about the place of “faith” in the Bush administration’s weird form of ecumenical evangelism, which had used the idea of faith-based organizations to allow the covert infiltration of a certain brand of religion into American civic life, with a definite bias towards white, Protestant, evangelical forms rather than say, to Muslim, Catholic, Jewish, Hindu or Rastafarian forms. [...]

Practically, what does this mean? It means austerity, chosen or imposed: less insane credit-card acquisitions, less whacky mortgage seeking, less obese cars, fewer happy miles on the road, fewer “business expenses” (unless of course we are senior AIG executives). It means leaving our money in the banks and having renewed faith in the FDIC, for if we race to our banks and take our money home in cash, we shall show our lack of faith in the banks, and the banks will suffer, and if the banks suffer, the world financial markets will suffer, and if the world financial markets suffer, the volcanoes will explode, the rivers will flood, the lightning shall strike, and all of us will be reduced to ashes, along with our melted credit cards, our worthless pension funds and our homes with negative equity.

But Faith, it turns out, is not enough. Capitalism, as a master-belief system, reasonably operates on faith. But markets, especially capitalist financial markets, need something more specific: Trust. And that is the second biggest Revelation of the last few weeks. We have a trade deficit, as we all know, but much worse is our “trust deficit.” No one trusts the (financial) other anymore, we are told, and without trust no one lends and without lending the plastic ceases to work and everyday life comes to a complete halt. This news will come as a shock to all of us on “Main Street,” who trust our friends, our neighbors, our leaders, our churches and our employers as much—or as little—as we did last year. No, trust is not a Main Street problem, it is a Wall Street problem. In other words, banks won’t lend to one another, and that problem in the high mountains of finance is melting down into the valleys and plains of our everyday lives.

Why won’t the banks, the hedge funds, the investment banks and all the other gentlemen-rogues who are part of the banking business trust one another? Have they lost their faith in capitalism? No, not quite. They still believe in the financial markets and in the rightness of the larger principles of profit, speculation and upside risk. What they no longer trust in is—each other! And they don’t trust each other because they have constructed for themselves a version of the Prisoner’s Dilemma whereby they fear that each party’s self-interest lies in non-cooperation, and hence in suboptimal solutions, solvable only by a large infusion of cash from the outside to prime the Trust Pump.

The major arguments for the recent bailout still do not quite explain why the trust between banks evaporated when just a few weeks ago, the lending potlatch was in full swing, loans were being made to everyone except known felons, deportees or illegal migrants, and each of us on Main Street was receiving at least ten offers to get new credit cards every week. The banks trusted each other to a fault, and loaned money to one another as if there was no tomorrow. They became pathologically trusting of each other and were in an intoxicated haze of downstream trust-based lending. This orgy of trust was based on reversing Frank Knight’s great insight about risk and uncertainty, according to which uncertainty is what lenders should hate and risk is what they should seek to define and quantify, so they can take measurable risks to increase profits. It turns out that our banks have been pretending to know all about the risks they were taking, through devices which were mostly variations on derivatives. [...]

Yes, this is indeed a Ponzi scheme, but it is a Ponzi scheme with a few special twists: it required a certain number of arcane changes in the rules of accounting which allowed banks to disguise totally unspecified uncertainties as calculable (and profitable) risks; it required remarkable suspension of the elementary rules of government oversight over financial institutions; and it required a society that did not mind living with awesome amounts of debt at every level of its functioning. In other words, starting sometime in the 1980s we were already living in an FBE (Faith-Based Economy), in which no financial wannasteal really knew what derivatives were or how they worked, and each one hoped that they would be sitting on a secure chair (presumably in the Bahamas) when the music stopped. The music stopped because of the housing market (and the predictable end of the subprime lending orgy) but the game which stopped was a much larger faith-based system based on the radical replacement of risk by uncertainty.

Continue reading this post by Arjun Appadurai at the the Imminent Frame.