Friday, October 24, 2008

On Black Swans, Greenspan, Markets and Leaders

I read Nassim Taleb's The Black Swan some time ago. It is a wonderful, clear-eyed view of the world as you have not seen it. It is mostly about debunking what we think we see. If you haven't read it, have an analytical bent and enjoy ruminating over financial/economic theory, then this book may be for you. If I had to sum up the book in a nutshell, the basic message would be that most everything you hear from the so-called experts in the field of finance and economics is based on flimsy science, and the pseudo logic of mathematical models that are removed from reality. No wonder, then, that Taleb's ideas are in vogue these days.

Which brings us to Alan Greenspan's testimony to Congress, yesterday. Here we had the former high priest of economics (some would have him a demi-god), the father returning from retirement, the leader in whose wisdom we trusted (e.g. I don't know what he's talking about, but he does speak with authority and exudes confidence in his understanding of the wheels of finance and economics), the one whose steady hand had guided us through many a crisis before, this guy.. here we had this guy say that the current credit crisis had rocked (or in his own words, "shocked") some fundamental precepts of his world view, that he could not have seen the problem coming given that world view, and admit that he no longer thinks he understands how the world works.

On first hearing that admission on video, I let out a silence gasp. Moments later, I became aware that I had gasped. I wondered what had startled me about his testimony, but as I searched my feelings I could not come up with a why? Mr. Greenspan hadn't said anything I hadn't already known: I have never believed anybody knows how things in spheres of human affairs, such as in finance and economics, really work. But as the committee members proceeded to attack the fallen angel, the reason behind my instinctive recoil became evident.

The average committee member is not a financial genius: often, that is abundantly clear from the tenor and incoherence of their questions. Rather, they rely on the very same actors they are supposed to oversee for constructing an oversimplified, conceptual view of world finance they can understand. The believers (the ones who favored the facility of belief over the rigor of reason) were feeling betrayed by the priest who had lost faith. They were now rudder-less. They were mad to find out the priesthood had disbanded, and they lashed out at the poor 82 year old governer.

And it was not just the committee. The stock market too seemed not to like hearing Greenspan admit he couldn't understand how things had come to this. Yes, the market, with all its sophisticated actors, it too needs a high priest, something, someone to have faith in.

The old order is clearly gone. Ironically, the new order that will replace it will be founded on faith, too.

It may be that Greenspan's successor Bernanke has largely made the right decisions in this crisis. However, big crises summon leadership. The human collective is at its most irrational at such times. The voice of reason is inaudible; the voice of faith and hope is--the voice of a prophet. Mr. Bernanke's temperament is ill-suited to the task right now. But he might as well try. Perhaps he should make an about face, abandon the new openness that has diminished the Fed's mystique, adopt the old terse language of the priesthood that can be endlessly reinterpreted, and shepherd a new faith and thereby reestablish trust.