The postmodern recession

March 3rd, 2009
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My Open Range column from the March 2009 issue of Alberta Venture magazine:

Instead of dealing with reality, the stimulus craze furthers the delusion

You’ve likely heard the expression, “Mugged by reality.” It usually refers to having a treasured ideal shattered by some stubborn feature of human nature or unbending aspect of science or geopolitics. I’ve been eager to proclaim that the financial meltdown shows our world being mugged by economic reality. But increasingly, it seems humanity is attempting to perform a multitrillion-dollar mugging of reality.

This is the first postmodern recession. It combines baby-boomer self-absorption with the ahistorical ignorance of the following generation, plus the acute narcissism common to both. The accompanying histrionics erase perspective and proportion – and the chance for rational analysis. Except for a few scapegoats, everyone’s a victim. Above all, there’s a collective desperation to avoid consequences. Nearly all the measures to “fight” the recession are attempting to lead people, industries and systems right back to where they were. Politicians yammer about a “new economic model” but borrow from the future to restore the old one. We will not be bent or broken by economic reality; we will reshape it to serve our desires!

It began, in my view, largely with another dimension of the postmodern mindset: our era’s extreme aversion to risk and campaign to drive risk from its normal roles in everyday life. In an era of artificially low interest rates, what historian Niall Ferguson calls “Planet Finance” demanded continued returns of 8% to 10% or even better – but all in an “investment grade,” AA+, allegedly risk-free setting. It was almost a working definition of psychosis. You can’t eliminate objective risk. It’s not only utopian, it’s undesirable, because risk helps uncover real costs to weigh against benefits. The game became erasing subjective risk – to feel protected. A gigantic illusion, levering the postmodern mind’s decades of training in relativism and denial of objective truth. In fact, trillions of dollars were exposed.

Look, I’m not peddling some eccentric “grand unification theory” or Unabomberish monocausal manifesto. Obviously, numerous factors were at play: decades of bad policy, economic and industry trends, popular habits and desires, greed and complacency, millions of individual decisions, sheer chance. But moral hazard, whose mere mention practically short-circuits the postmodern mind, has to be included. Key to setting up the fall was the gigantic pipeline of loans that never should have been made which, through a series of moves that to this day few people understand, disgorged allegedly safe investments unmoored from any tangible asset.

It was a system of laundering risk. Its apotheosis was the “credit default swap” or CDS. While any given CDS looks prudent and realistic to an auditor or CFO, collectively the CDS represents an attempt to ensure the entire financial structure against systemic failure. Tortuously complicated, but with two key dimensions. First, as Ferguson points out, immensity: the estimated notional value of CDS reached $58 trillion at year-end 2007, greater than the world’s annual economic output. Second, sheer conceptual absurdity. Another writer remarked it was analogous to passengers on the Titanic purchasing life insurance from one another.

Last autumn came like a series of nuclear bombs on stock exchanges, central banks, boardrooms and finance ministries. But the rumbling only drove us deeper into delusion. Events were described as the worst in a generation, in our lifetime, maybe ever. There was the beyond-parody claim that Barack Obama faced greater challenges than Franklin Roosevelt or even Abraham Lincoln. As Ambrose Evans-Pritchard noted, during the Great Depression debt-ridden homeowners actually shot lawyers who attempted to enforce foreclosures and 100,000 Americans fled 25% unemployment for Stalin’s Soviet Union.

But to many of today’s 20- and 30-somethings, terms like “generation,” “lifetime” and “ever” mean little different from “now.” Utterly unschooled in history, their personal experience is all there is. Just as every successive generation is convinced it invented sex, this one sincerely regards literally any event as the first, biggest, best or worst ever. It was brilliant young quantitative analysts who concocted the CDS edifice. The entire hedge fund industry – its assumptions, conclusions, trading behaviour and massive leverage – was based on only five years of data, excluding 98% of stock-market history.

Another element of postmodernity is the triumph of intentions over actions. The effectiveness of measures matters little and long-term consequences, not at all. Governments focus on being seen to be helping. So it becomes about “kick-starting” the economy – as if the economy’s a discrete machine or organism.

As for avoiding consequences and going back to the old ways, examples abound. Debt was an addiction and spending a curse – yet today we’re being exhorted to borrow and scolded for saving. Interest rates are at virtually zero, yet credit is alleged to be hard to come by. Canada’s ABCP deal gets most investors their “money back” while shielding the purveyors from lawsuits – avoiding accountability all around. Recently something called the “Canadian Trails Federation” lauded the federal budget for shovelling more money its way. Such subsidies are a frivolity under any circumstances, and should be among the first things jettisoned when times are tough. Yet they get more money. It encapsulates the madness.

I prefer British Conservative Matthew Parris’s prescription for today’s mess: “We must bash out the dents, clear the broken glass, remove the bumper from the front wheel, and limp on as best we can.” Eminently sensible. And a foreign language.

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By George Koch