Economics Financial Crisis

The Financial Crisis as a Mood

Christopher Caldwell in The Weekly Standard (via David Brooks):

Neither Barack Obama nor John McCain had much of value to say about the financial crisis as it raged through the headlines this fall. Rather than shred their campaign strategies, they played it safe, as most politicians would have. But in the name of justice we ought to recall that there was one candidate who did foresee our predicament with considerable accuracy when it still lay far in the future. Ron Paul, in almost every speech he made during the Republican primaries, spoke of bubbles, reckless credit growth, and the “unsustainability” of present policy. So why isn’t there more demand for the common-sense solutions he put forward? Because common sense is not much use in a financial panic.

This was the great discovery of Walter Bagehot, the prolific 19th-century essayist and journalist, who was editor of the Economist from 1860 to 1877. (His name rhymes with gadget.) Ninety-nine percent of the time, common sense is a synonym for practicality. But in a serious banking crisis, doing the commonsensical thing–hunkering down and counting your pennies–has proved to be not practical at all.


So the “cultural contradictions of capitalism” run deeper than we thought. The classic idea, as laid out in their different ways by the economist Joseph Schumpeter and the sociologist Daniel Bell, is that capitalism rewards diligence; diligence produces wealth; wealth begets idleness; and idleness undermines capitalism. But when, as now, push comes to shove, we can ask whether there is really anything particularly capitalist about the virtues of diligence and self-restraint. The real capitalist virtues appear to be optimism and luck. From a central-banking perspective, the cultural contradictions are not results of capitalism but elements of it.

The problem with central banking is that it reacts to a system that has been mismanaged by rewarding the managers.

But this closing is what really gets me:

To be blunt, credit is successfully reestablished when financial elites say, “When.” Credit is close to a synonym for the mood of the ruling class. To say an economy is based on credit is to say it is based on animal mysteries. Glamour, prestige, élan, sprezzatura, cutting a figure .  .  . that is what the economy is made of. It is a rather terrifying thought.

Credit as a synonym for the mood of the ruling class – how frightening yet illuminating. But read the rest of the piece too. Caldwell – whose work I haven’t usually enjoyed – gives conservatism a good name with this piece. It also slipped by me though that Caldwell, while giving a generally conservative justification for the extreme government intervention of a central bank and government during a crisis, subtly invokes John Maynard Keynes. Keynes wrote in The General Theory of Employment, Interest and Money that:

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. [my emphasis]

As Hans O. Melberg summarizes the passage: ” It is clear that Keynes believes economic fluctuations can be partly explained by spontanous (or exogenous) shifts in moods (optimism or pessimism).”

If Caldwell is any indication, it seems that liberals and conservatives can now largely agree about the instability of markets.