Caroline Calais -- Democracy in Americas

The pack at Wall Street is running scared (again), and it really makes me wonder – don’t those guys have a single original thinker among them? Obviously not and it all has to do with hormones. Yes, you heard me right. Hormones associated with stress, sexual development and aggression explains the irrational group behavior associated with market bubbles and crashes.  This is at least what two British researchers found in a study published this week in the journal Proceedings of the National Academy of Science. But it might make sense, it was for example, the strange behavior of traders during the dot-com boom that inspired John Coates, a senior research fellow at Cambridge, to look at the link between hormones and trading.“I began to think that the people involved in this insanity were under the influence of some drug”, he says. “When it was all over, they were like people in a hangover. They couldn’t believe they had bought some Net company with no earnings, no interest plan and lost all of their savings”.

Well, a lot of people I know didn’t even think there was a risk for the dot-coms to go bust – we were all in the “new economy” they said. I remember writing a paper where I questioned this, the whole hype reminding me very much of the story “The Emperor’s New Clothes” by H.C Andersen. I got my paper back filled with red pen marks, my comparison to The Great Depression crossed out and the word Not Relevant scribbled over it. I guess the professor hadn’t read H.C Andersen or studied history.  And here is where we always go wrong, we are too specialized! For how else can we make the same mistake over and over again? I am not very old but I lived through the real-estate bust in Sweden in the early 90s, the bank crash in Venezuela in the mid 90s, the telecom/dot-com bust in the US beginning of 2000s and now the mortgage crisis.  And it isn’t rocket science. The market crashes I lived through have a common denominator. Technology and/or policy innovations.

The invention of the Ford assembly line, vacuum cleaners and other household appliance is very much to blame for the Great Depression for example. For the Ford-Model of economic growth did not only require faster circulation of mass-produced goods, it also required high levels of consumption. More or less in the same way as the telecom/dot-com industry required faster circulation of services. But as institutions and public policy was slow to adapt to the sudden changes in household spending and credit patterns that occurred in the 1920s – the Federal Reserve dealt badly with the new invention consumer credit, sticking to the real-bill doctrine thus making papers issued by consumer credit agencies ineligible for rediscount thereby allowing banks to apply a higher rate of discount, passing the cost from the credit institutions on to the consumer – a depression followed. The higher interest rates reduced the volume of consumer financing, depressing the profits of firms making cars and refrigerators’. Kind of the same way interest rates on sub-prime mortgages depressed the housing market.  So when technology innovations ( the expansion of sub-prime mortgages lending was in large part spurred by technological advances that reduced the cost for lenders of assessing and pricing risks)  is not followed by the appropriate institutional- and policy change we are very much screwed.

More or less as screwed as we are when institutional- and policy changes are not followed by the correct technology. Liberalizations in Venezuela were for example forced before a safety net was put in place and before functioning regulatory framework was set. And the collapse of the housing market in Sweden a result of the deregulation of the financial markets during the 1980s. The social democratic  comprehensive social network, including labor market policies, public regulation and subsidies in areas such as agriculture and housing, lost essential elements of its supply side policy that before had been used to secure full employment, price stability, growth, and redistributive aims.

So we better get used to instability and volatility. We humans are by nature innovators, but also animals filled with testosterone.