Friday, July 4, 2008

Conspiracy, perhaps not......

I received an unusual question today, as follows:

'Reading your essays one can't help but wonder at the enormity and depth of the government cock-ups that have made us the country we are today.

Looking at the exquisite perfection of the US and UK's problems, do you ever, just for a fleeting moment, wonder whether any of this might have been deliberate?'

I hope that I have not misunderstood the intent of meaning of this poster. It appears that there is a suggestion of conspiracy, that there is some malign purpose in what is occurring in the UK/world economy. I am not sure I have it right, but I will answer on that basis.

The short answer to this question is 'no', there is no conspiracy.

My own view is that the current situation stems from group think, vanity, pettiness, personal ambition and sometimes (good, old fashioned) stupidity.

For example, if we take the sub-prime fiasco, what were the causes? The answer is simply that someone came up with a very clever way of repackaging debt that separated risk away from the lender. It allowed for a massive expansion of business and, to those selling instruments such as CDOs, it allowed for big profits to be made. As such, the problem was created by the urge to make money. The stupidity part was that the same institutions that enjoyed the benefits of selling toxic loans were also, through other parts of the institution, directly or indirectly, buying such toxic waste. I have every confidence that there were people within the organisations that were highlighting the dangers, but they were more than likely sidelined. After all, who wants a party-pooper when it all appears to be going so well? Why spoil the party? In such circumstances, no one likes the person in the meeting who is asking the awkward questions.

If we look at government handling of the economy, for example the UK government, we can ask the same kind of question. What caused the government to follow such a disastrous economic policy?

In the case of the UK Gordon Brown was steering government economic policy. If what we read about Gordon Brown is true, he appears to be a very vain man, convinced of the power of his own intellect. As he was presiding over what appeared to be an economic boom, did it ever occur to him that the boom was built on a foundation of sand? I think that it probably did, but his own vanity would get in the way of accepting such an assessment. Instead of looking at the reality of the situation, it was far easier for him to convince himself that it was his sound judgement that was at the root of the 'economic success'.

Gordon Brown no doubt saw himself as an intellectual with power enough to shape the world around him. A wonderful illusion, but nevertheless an illusion. I have mentioned in a previous post that he may have intervened to prop up the house market. Was this part of an evil conspiracy? I think not, and am confident that he found self-justifications for what he did, outside of recognising that what he was doing was supporting an artificial boom. Undoubtedly fear of being 'found out' was the true motive, but people with such vanity are unlikely to accept their own fallibility.

Again, there were undoubtedly those who were questioning the wisdom of policies that were creating such apparent economic success. With international respect, acclaim, the respect of the press, and so forth, why would Gordon Brown want to hear the truth of what was really happening. After all, he could point to the numbers or to the economists (cheerleaders) that supported the view that all was going well. If the whole world says you are clever, capable, doing the right thing, then why would you not believe in your own brilliance. Until the last couple of months, people like myself (the cynics) were a minority (in my case a person with no power to influence, and saying things that nobody wanted to hear). Within government, do you think that any cynic's voice would be heard? After all, Gordon Brown had the charts and figures to show that all was going well. He could point to the holy grail of economics, growth in GDP.

The same can be said of the other western economic leaders, such as Alan Greenspan, who have presided over the recent boom. One and all, they believed they were 'masters of the universe', giants who (with their intellect) were guiding the world economy to success. As these leaders patted each other on the back, and offered their mutual admiration, they were steering the west into an economic black hole. The sad, and human, part of this is that they believed that they were in control, and that they convinced themselves of their own brilliance.

It would be nice to think that there was some conscious conspiracy behind the current mess, that there was some master plan, and that the situation has some purpose behind it. However, the reality is that the source of the mess is more prosaic. It does not lie with highly intelligent individuals making plans in smoked filled rooms. Instead it lies in the fallibility, weakness, personal ambition and vanity of very ordinary and foolish people.


  1. Hi Mark

    (I'm assuming you are MarkInChina on CiF?)

    Yes, I asked the question which implied the possibility of 'conspiracy'. Thanks for your answer.

    I'm 99% sure you're right that it is all down to weakness, vanity and so on, but I still have this nagging doubt which stems from some of the other peculiar things which the government does: Iraq, ID cards, Titan prisons, suspension of habeas corpus and so on. Gordon Brown stated "no return to boom and bust" and then, seemingly consciously, went on to stoke up the biggest boom and bust in history. It just seems very odd...

  2. Mark

    Just a further comment on the above piece. You mention that the people in charge are believed by most people to have brilliant intellects. (Gordon Brown, is known for his avid reading and fondness for "post-neoclassical endogenous growth theory"). Yet it seems to be these giant intellects that have brought us to the edge of the abyss. Is any of this supposed intellectual brilliance necessary to run an economy?

    I work in engineering with a bent towards 'fuzzy' control of systems and I've done quite a lot of it over the years. I can't help but notice that people who have had just a little formal training in the subject have far fewer doubts in their own abilities than I do. (This might describe Gordon Brown in the economics field?) They often believe that they can achieve great results by measuring the performance of 'the system', and using feedback to adjust some parameter(s) to keep the measurements within limits that they set. Negative feedback to tame raw gain or power, is an extremely common concept in engineering and I am sure the principle is applied in economics too.

    This whole scheme relies on a very simple system, or a good 'model' of the system and sufficient measurement points and controls to tweak. A very complex system internally can be very simple on the outside. Some systems cannot be modelled sufficiently well and in this case they may be controlled 'heuristically' with failsafe mechanisms which may impede performance but which prevent the system from going out of control.

    The impression I get of Gordon Brown's running of the economy is of over-simplified negative feedback mechanisms (e.g. a single dubious measure of inflation used to set a single interest rate) combined with ad hoc tinkering with the rules, such as changing the start and end points of the 'economic cycle'. He looks like a man who believes, in principle, that the economy is a machine that must regulate itself with a minimum of human intervention (he probably believes that it is fallible politicians who have led to boom and bust in the past), but who also can't resist tweaking it heuristically. In his own head, by tweaking the rules themselves he manages to achieve both at the same time. It means that he is achieving the worst of all worlds by dogmatically ignoring warning signs (he thinks the machine will regulate itself) and yet tweaking the controls to achieve what he perceives as better results - in effect, positive feedback.

    The main point, however, is that there doesn't seem to have been any provision made for a failsafe mechanism to prevent 'runaway'.

    (I've used the name "northerner" but it just occurred to me that there might be someone with the same name on CiF. If so, we are not the same person!)


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