A crisis is usually thought of as acute and punctuated. In the usual sense, a crisis is an event and an event is discrete. But what of an extended crisis, one without enough acuteness to merit the more common uses of the word? What of crisis deferred or not allowed, and thereby attenuated?
Some observers of the financial crisis of 2008 see current events as part of an extended crisis that has been attenuated by policymakers. Much of policy response to financial crisis can be viewed and is viewed by many as not enough or never enough, especially as regards stimulus, both monetary and fiscal. But there is another broad side of policy response that involves not only stimulus but also direct support or stabilization of an ailing banking system through for example bailout, direct support, and the forestalling of the pricing in of loss (i.e. suspension of mark to market pricing ). The freezing of market pricing in a kind of “amber” is a good example of an attenuation of financial crisis through the forestalling of market pricing mechanisms.
Ashwin P. of Macroresilience.com has written extensively about stabilization versus resilience and of how in complex systems (i.e. global finance), stabilization can and does paradoxically lead to decreased resilience in a complex system. Ashwin mentions the example of how forest fire suppression has led to catastrophic fire danger and less fire resilient forests. Stabilization of a financial system by policymakers during the “great moderation” has paradoxically led to decreased resilience. Hyman Minsky is often credited with what is known as the financial instability hypothesis which states that conditions of stability lead to instability or as Ashwin writes, to lack of resilience. In other words, stabilizing and backstopping the financial system has led to conditions of instability that have come home to roost in the form of an extended or rolling crisis. Ashwin has done an excellent job of outlining the costs incurred in terms of endemic fragility and I recommend his blog for an exploration of that aspect of the problem of financial policy. In this post, I want to begin to ask about the costs of attenuation itself, about the costs incurred when a deemed to be too fragile system is not allowed to experience failure or loss.
Because the large bank holding companies and the systemic financial system was perceived as too fragile to allow for active pricing, mark to market accounting was, for example, suspended in 2009, and since that time many of the weaker large banks have been taking not writedowns but writeups on their portfolios and they have been reducing their loan loss provisions, all this with the implicit blessing of policymakers. This has forestalled punctuated crisis and attenuated the pricing in of deflation and decay in their mortgage portfolios, and it has also helped the banking system avoid facing a solvency crisis.
What are the costs of such policies? The system is perceived to be too fragile to handle writedowns and proper pricing of impaired and deflating assets, so assets are held at “model to maturity” prices. In the words of John Hussman quoted in the creditwritedowns.com article linked above, he says that “the U.S. financial sector [has become] essentially opacity masquerading as solvency”. Whatever the merits of favoring opacity, what are the costs of it?
I have a parallel in mind to this policy that is drawn from the work of psychoanalytic work of Wilfred Bion.
It used once to be said that a man had a nightmare because he had indigestion and that is why he woke up in a panic. My version is: The sleeping patient is panicked; because he cannot have a nightmare he cannot wake up or go to sleep; he has had mental indigestion ever since.
If I translate this analysis of an individual into a social and economic analysis, I might say that the inability of the “system” to allow for the nightmare of failure can promote an attenuation of crisis in which an economy neither experiences a punctuated or terminal crisis nor a subsequent recovery. We might then profitably speak of an economy that has a type of “mental indigestion”. If a large portion of an economy cannot price in or take a loss, then the effort to attenuate that experience of loss may forestall recovery as much as it forestalls catastrophe.
Bion replaces an old conception of the nightmare as a negative experience that is the accidental and transient effect of a physical cause with a notion of the nightmare as negative psychical experience that is both the product of and the opportunity to experience the negative or the difficult. In Bion’s view, an individual may be unable to “thoughtfully” process “food-for thought” or emotional experience and a nightmare is both an opportunity for and a limit of capacity for “learning from experience.” The inability to have a nightmare, to experience or work through the negative, is itself a condition of “mental indigestion.” Elsewhere, Bion describes such an individual as unable to contact “reality” and as “truth starved.”
I’ve focused in this post on the example of the US financial system and not that of the EZ because the US has more capacity to forestall and attenuate crisis and because the EZ may be forced into punctuated and more catastrophic crisis. My intent here is to begin to think through and to suggest what the costs to and the conditions are of a society and an economy that can somewhat effectively forestall and attenuate financial crisis. To suggest that it may be salutary for an individual or a society to actually have a nightmare and to “take the loss” or experience loss is not necessarily, I want to add, to sadistically suggest that people ought to suffer in unmitigated fashion. A condition in which a person or a society cannot learn from experience, a condition in which an individual or an economy is “truth starved” and unable to contact “reality” is, I rejoin, a species of suffering. The experience of loss is a type of suffering that can be acknowledged and mitigated by care, but how does a society or an individual even begin to learn from let alone heal a type of sickness or suffering that cannot even be acknowledged?
The visible and evident costs to an economy or society that resorts, out of inability to mentally digest truth, to opacity and to the engineering of the signs and signals of premature stability or even recovery are perhaps only the tip of the iceberg of the full extent of the costs. Those evident costs would be: prolonged uncertainty due to lack of visibility into long term viability of firms; a pronounced “valuation” problem; volatility in actively priced markets; inability of markets to “clear”; etc. The deeper costs might be?
1.Wilfred R. Bion, Learning From Experience, p. 8. ↵