Sunday, December 23, 2012

The Baron von Münchhausen economy

A couple of years ago Emily Yoffe wrote an article on narcissism for Slate. Reading it, one could readily conclude that Alexis de Tocqueville’s and Christopher Lasch’s warnings had finally come to pass. Then Yoffe appeared on the Colbert Report and made the argument that narcissistic behaviors had helped ignite the financial crisis. To which Colbert retorted: “But the economy and the market are really just built up on confidence. Why don’t we just recapture that narcissism that we had a year ago and just pretend that everything is OK? And won’t the market just come right back? Won’t we just rebuild the bubble?”

A few years later, it seems the strategy for economic revitalization Colbert suggested has worked quite nicely. An article on the Business Week web site asks: “In a World Full of Risks, Why Are Investors So Calm?” The author points to a graph according to which risk aversion in all sorts of speculation – oops, investment – “is at a record low going back to 1980. As the article reminds us, “that span includes the Crash of ’87, the rolling emerging-market contagions of the 1990s, and the multiple human and financial calamities of the past decade.

An analyst gives the following explanation: “The so-called Bernanke put—or, more accurately, global central bank put—is suppressing most of the risk and fear gauges. And just about all asset classes, risky or risk-free, have been bid up.” There may be, though, a more elegant theory – delusional thinking has now become a lot more common than it was during previous periods of financial duress. I also heave a theory explaining why this shift has come to pass, but it’s a bit too depressing to lay out just before Christmas – for me, not for the investors on whose daring risk-taking it would shine much needed light.