by Peter Diekmeyer, Sprott Money:
America’s top forecasters missed the 2008 market crash, during which stock investors lost half their money. Now with stocks approaching bubble territory it looks they are again ignoring warnings signs. What gives?
The biggest red flag is the S&P 500 index, which groups 500 of America’s largest public companies and is trading near record highs. This despite a sluggish US economy driven by record government spending, borrowing and money printing.
In short, conditions look exactly like those that prevailed just before the 2008 financial crisis, when equities investors lost half their money in a matter of months.
So why haven’t the experts, many of whom are near-genius-level, ivy-league professionals, provided clear warnings about the risks in the system?
The S&P 500 index
Wisdom from a 1970s self-help guru?
One clue might come from consulting creative thinkers from outside the economics profession, like er…Robert Ringer?
Yes that Robert Ringer. The self-help guru, who in his 1970s best-seller Looking out for #1, outlined a useful template to use when assessing human behavior.
“All people act in their own interest all the time,” writes Ringer, who believes that people re-define self-interested actions to make themselves look virtuous.
What Ringer calls the “definition game” enables politicians, like recently-retired ex-Conservative Party leader Rona Ambrose who took home nearly $5 million in salaries and pension benefits for just 13 years work, to describe herself as a “public servant.”
Ringer’s “human nature group” theory in many ways explains modern human action better than Hobbes, Nietzsche and even Ayn Rand, yet appears dark when applied to individuals – even to politicians. However it has a strong basis in academic theory.
Foreign policy experts, for example, broadly accept that governments (which combine individual actions on a massive scale) act in their own interests all the time – and that they invent justifications as they go along. Otto von Bismark, a key innovator in international relations theory, describes this as realpolitik. If governments act that way, it should be no surprise that politicians – and the people who voted for them – would do so as well.
Are economics and financial forecasters “Looking out for #1?”
To apply Ringer’s theory to explain why expert, ivy-league-trained forecasters and regulators are all wrong, all the time when predicting recessions and stock market crashes, we would start by asking where their interests lie.
Governments want to spend
Ringer’s theory suggests that – however well-intentioned they are – that politicians’ main interests are not to do a good job, but to get re-elected, and, more broadly, to maximize their lifetime potential earnings and prospects.
If Ringer is right, then it should not be surprising that politicians would condone optimistic forecasts that encourage governments, consumers and businesses to borrow and spend because the resulting short-term economic activity would help them win the next election.
In this scenario accumulated debts would only matter to those politicians if the issue showed signs of imploding on their watch.
Financial Institutions want to borrow
Economists and forecasters at the big financial institutions are among the world’s best trained and highly-respected. This despite the fact they too missed the 2008 crash and recession.
If we believe Ringer’s theory that financial sector forecasters are acting in their own interests all the time, this would suggest that they are likely working for bosses who are more concerned with generating new business than with being accurate. In that scenario the accuracy of their forecasts would be
less important than how much activity they encouraged.
It would also suggest that any big bank forecaster that had a consistently and markedly bearish outlook would be fired.
Auditors and regulators priories rent extraction
Experts say that one of the American financial system’s major advantages is the high quality its watchdogs, such as the SEC, FINRA, FASB, public accountants, ratings agencies and other regulators.
Yet despite positive reports from all major public accounting firms and US regulatory bodies, all the major US banks and much of the auto sector had to be bailed out during the last financial crisis. None, have provided any warning of significant threats this time around.
Ringer’s “self-interest theory” would argue that the reason for this is that regulators are more incentivized to extract rents from the system than in serving the public.
If that is true, you would expect to find regulatory bodies adding rules (such as voluminous Dodd-Frank regulations), staff and boosting salaries, but also making sure that their departments would only have undefined responsibilities, so they would not be blamed if another crisis hits.
They could then use a subsequent crisis to ask the public for even more funds, powers and staff.
Speak nicely, but verify
If Ringer is right why doesn’t mainstream media, or even independent analysts,report this? One reason, is that in polite society, it is very hard to question someone’s motives. Particularly if you have to deal with that person regularly and he (or she) may one day have an opportunity to help you (or to extract payback).
The Economist magazine balances its posture by only questioning the motives of leaders of countries outside the western orbit like North Korea, China, Iran and Russia, whom they regularly describe as “solely interested in keeping power.” However the actions of Western governments, whom the magazine courts,
are generally reported as acting for the public good.
Hedge your bets
The idea that a 1970s self-help guru’s theory provides a guide as to why another financial crisis may be inevitable seems laughable.
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