The Hands Take A Vacation

Despite all his optimism, I think it a bit embarrassing that the International Monetary Fund’s Chief Economist Olivier Blanchard must probably walk around in adult diapers these days. There is certainly a run on that commodity by central bankers from Tokyo to Vienna. With terms like “plunge” and “bleak” splashed across newspapers and the Internet, the rest of us can’t be far behind.

The grim faces and grimmer statements of capitalism’s financial pilots don’t instill much confidence in us lesser luminaries. For all we know, the dark well we’ve fallen into may have a set of sharpened spikes at the bottom to finish off any survivors.

But to even the simpleton, it appears the markets are flush with capital. Money oils the global financial system and it’s available in good supply as Central banks continue pumping in billions of dollars daily. There should be fewer jitters, yet something is still badly wrong in the marketplace. It has to do with fear.

Fear is the greatest weapon of terrorists. We’re told in a free market, freedom from fear is necessary for the economy to function and thrive. U.S. consumers stopped spending in the days and weeks following 9/11. As fear and uncertainty ruled, economic momentum ground to a halt.

So now it’s strange that the apprehension dogging us comes not from falling buildings or exploding planes, but from the behavior of reckless institutions (see Lehman Brothers) intertwined with dysfunctional regulatory mechanisms. As a Mid-Western banker recently confided, “The entire system from the top down was incentivized to approve risky transactions; no one was paid to exercise restraint.” At first glance it’s like a sailor’s whorehouse in Mombasa, and then you wake up and realize he’s talking about a major part of the U.S. financial system. As the fog lifts, culpability will extend to a busload of Congressmen and a few former administrations as well.

Sir Kenneth Clark once said

“It is lack of confidence, more than anything else, that kills a civilization. We can destroy ourselves by cynicism and disillusion, just as effectively as by bombs.”

Well, now we see that happening almost daily. Even more bleakly, the gestating socio-cultural tremors from such a financial downturn haven’t even been considered. Social tolerance and faith in government institutions could be the first victims.

For the moment, restoring confidence is everything — and we’ll have to do it without the “invisible hands of enlightened self interest” touted by former Federal Reserve Chief Alan Greenspan. Tasked to right any flailing economic ship, they seem to have taken a vacation… if they were ever there at all.

~ by deadmanscurve on October 11, 2008.