"Long before it's in the papers"
January 27, 2015


Can whole economies be psychoanalyzed?

June 6, 2012
Courtesy of the Uni­vers­ity of Leices­ter
and World Science staff

West­ern economies dis­played the same kind of man­ic be­hav­ior as psy­cho­log­ic­ally dis­turbed peo­ple in the runup to the 2008 cred­it cri­sis—and it could hap­pen again, a new study claims.

Bankers, economists and politi­cians shared a “man­ic cul­ture” of de­ni­al, om­nip­o­tence and tri­umphal­ism as they threw cau­tion to the wind, said Mark Stein, a schol­ar from the Uni­vers­ity of Leices­ter School of Man­age­ment in the U.K.

Ob­serv­ing but not heed­ing warn­ing signs from the Jap­a­nese econ­o­my’s col­lapse in 1991 and the 1998 cri­sis in south­east Asia, the fi­nan­cial world in the West went in­to an over-drive of de­ni­al, es­ca­lat­ing its risky and dan­ger­ous lend­ing and insur­ance prac­tices, he said.

Stein re­ports his work in the re­search jour­nal Or­gan­iz­a­tion, in a paper entitled “A cul­ture of ma­nia: a psy­cho­analytic view of the incu­ba­tion of the 2008 cred­it crisis.”

The causes of the bank­ing col­lapse that plunged many coun­tries in­to re­ces­sion have been well doc­u­mented. But why did economists, fi­nanciers and politi­cians fail to an­ti­cipate it? Stein ar­gues that the fi­nan­cial world had been suf­fer­ing from col­lec­tive ma­nia for a good two dec­ades. “Un­less the man­ic na­ture of the re­sponse in the runup to 2008 is rec­og­nised, the same eco­nom­ic dis­as­ter could hap­pen again,” he warns.

He de­fines the “man­ic” cul­ture in terms of four char­ac­ter­is­tics: de­ni­al, om­nip­o­tence, tri­umphal­ism and over-acti­vity. 

“A se­ries of ma­jor rup­tures in cap­i­tal­ist economies were ob­served and not­ed by those in po­si­tions of eco­nom­ic and po­lit­i­cal lead­er­ship in West­ern so­ci­eties. These rup­tures caused con­si­der­able anx­i­e­ty among these lead­ers, but rath­er than heed­ing the lessons, they re­sponded by man­ic, om­nip­o­tent and tri­um­phant at­tempts to prove the su­pe­ri­or­ity of their economies,” he wrote.

“The mas­sive in­crease in cred­it de­riv­a­tive deals, in­dus­t­ri­al­iz­ing cred­it de­fault swaps and the re­mov­al of reg­u­la­tory safe­ty checks, such as the re­peal in the Un­ited States of the land­mark Glass-Steagall bank­ing con­trols, were a man­ic re­sponse to the fi­nan­cial cri­ses with­in cap­i­tal­is­m,” he added.

As a cred­it crunch loomed, sen­ior fig­ures, such as Ben Bernanke, the then chair­man of the U.S. Fed­er­al Re­serve Bank, drew a sharp dis­tinc­tion be­tween economies of the West and Ja­pan. Bernanke’s “great modera­t­ion” speech in 2004 claimed the avoid­ance of ex­tremes made him “op­ti­mistic about the fu­ture,” Stein not­ed. Weeks be­fore the col­lapse of Leh­man Broth­ers in 2008, Bern­anke claimed that the sce­nar­i­os that be­fell Ja­pan and south-east Asia could be avoided in the West.

Stein claims this be­hav­ior was al­so strength­ened by “tri­um­phant” feel­ings in the West over the col­lapse of com­mun­ism.

“Wit­ness­ing the col­lapse of com­mun­ism, those in pow­er in the West de­vel­oped the de­lud­ed idea that cap­i­tal­ist economies would do best if they es­chew any re­sem­blance to those com­mun­ist economies, there­by jus­ti­fy­ing un­fet­tered fi­nan­cial lib­er­al­iz­a­tion and the de­struc­tion of the reg­u­la­tory ap­pa­ra­tuses of cap­i­tal­ism. The con­se­quenc­es of this man­ic re­sponse have been cat­a­stroph­ic, with the on-going eu­ro­zone cri­sis be­ing—in many ways—a re­sult of this,” he said.

“Whether one ex­am­ines the ac­tions of banks and hedge funds, or the lim­ita­t­ions of rat­ings agen­cies, au­di­tors, reg­u­la­tors and go­vernments, a more wor­ry­ing and deeper ques­tion emerges con­cern­ing why so many par­ties, more or less si­mul­ta­ne­ous­ly, were im­pli­cat­ed in such un­prec­e­dent­ed and ex­treme risk-taking.”

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Western economies displayed the same kind of manic behaviour as psychologically disturbed people in the runup to the 2008 credit crisis—and it could happen again, a new study claims. Bankers, economists and politicians shared a “manic culture” of denial, omnipotence and triumphalism as they threw caution to the wind, said Mark Stein, a scholar from the University of Leicester School of Management in the U.K. Observing but not heeding warning signs from the collapse of the Japanese economy in 1991 and the 1998 crisis in southeast Asia, the financial world in the West went into an over-drive of denial, escalating its risky and dangerous lending and insurance practices in a manic response, he said. Stein reports his work in the research journal Organization. The causes of the banking collapse that plunged many countries into recession have been well documented. But why did economists, financiers and politicians fail to anticipate it? Stein argues that the financial world had been suffering from collective mania for a good two decades. “Unless the manic nature of the response in the run up to 2008 is recognised, the same economic disaster could happen again,” he warns. He defines the “manic” culture in terms of four characteristics: denial, omnipotence, triumphalism and over-activity. “A series of major ruptures in capitalist economies were observed and noted by those in positions of economic and political leadership in Western societies. These ruptures caused considerable anxiety among these leaders, but rather than heeding the lessons, they responded by manic, omnipotent and triumphant attempts to prove the superiority of their economies,” he wrote. “The massive increase in credit derivative deals, industrializing credit default swaps and the removal of regulatory safety checks, such as the repeal in the United States of the landmark Glass-Steagall banking controls were a manic response to the financial crises within capitalism,” he added. As a credit crunch loomed, senior figures, such as Ben Bernanke, the then chairman of the U.S. Federal Reserve Bank, drew a sharp distinction between economies of the West and Japan. Bernanke’s “great moderation” speech in 2004 claimed the avoidance of extremes made him “optimistic about the future,” Stein noted. Weeks before the collapse of Lehman Brothers in 2008, Bernanke claimed that the scenarios that befell Japan and south-east Asia could be avoided in the West. Stein claims this behaviour was also strengthened by “triumphant” feelings in the West over the collapse of communism. “Witnessing the collapse of communism, those in power in the West developed the deluded idea that capitalist economies would do best if they eschew any resemblance to those communist economies, thereby justifying unfettered financial liberalization and the destruction of the regulatory apparatuses of capitalism. The consequences of this manic response have been catastrophic, with the on-going eurozone crisis being—in many ways—a result of this,” he said. “Whether one examines the actions of banks and hedge funds, or the limitations of ratings agencies, auditors, regulators and governments, a more worrying and deeper question emerges concerning why so many parties, more or less simultaneously, were implicated in such unprecedented and extreme risk-taking.”