Global agenda: Business as usual

By PINCHAS LANDAU
November 24, 2011 23:37

If public confidence snaps and a generalized run on the system takes place, then the system will inevitably disintegrate under the pressure.

4 minute read.



Asia [stock photo]

Asia 311. (photo credit: Thinkstock/Imagebank)

How people handle extreme situations is a subject that has attracted considerable academic attention for obvious reasons. Extreme situations are inherently fascinating, and the implicit questions that they generate – What should the people involved have done? What could they have done? What would I have done in their position? – strike a chord in almost everyone.

The main general finding is that people try to handle extreme situations as they do normal ones – by adhering as far as possible to what they consider normal, continuing their routine and keeping their lifestyle as close to usual as circumstances permit. Whether this represents rational, let alone desirable, behavior under the circumstances is open to debate. But there is no doubt that that’s how human beings tend to act. This is true even for lifethreatening situations; think back to how we behaved during the second intifada and the almost obsessive determination of the Israeli public to “get back to the routine.” It is certainly true for extreme situations that are not directly life-threatening.

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The current state of the world financial system is as good an example as you will find of an extreme situation that is not directly life-threatening. All the largest financial institutions in Europe and, by extension, across the world are in imminent danger of collapse. The specific reason is that a large chunk of their assets is comprised of contractual obligations of European sovereign entities, and the value of these assets is eroding at a rapid clip. For most of these institutions, at current market prices their assets are worth less than their obligations – or they soon will be, if the erosion continues. That state of affairs, when assets are worth less than liabilities, is the definition of being bankrupt.

In other words, we have come to the point where there is an imminent threat of a systemic collapse. What would or will happen in a systemic collapse is not clear: hopefully, the sovereign states will seize the insolvent institutions and enable them – and through them, the normal course of business for firms and households – to continue functioning, while a more fundamental and lasting solution to their problems is found.

However, since it is the sovereign states themselves that are the primary problem facing Europe, it may prove difficult for them to act as the source of salvation for the banks and insurance companies. The general public, bewildered and fearful, is holding back from taking any kind of action, but its confidence in the ability of the political and financial leadership to produce a real and viable solution is waning steadily. If public confidence snaps and a generalized run on the system takes place, then the system will inevitably disintegrate under the pressure.

This is hair-raising stuff, yet it is being discussed quite openly in the mainstream media and intensively in the blogosphere. But inside the financial system, at the heart of the maelstrom as it were, you wouldn’t really know that anything was seriously amiss – certainly not that many institutions and, indeed, the entire system are facing immediate existential threats.

People, including senior management, are carrying on as usual. They are deeply engaged in preparing or completing or discussing their firm’s business plan for 2012. Alternatively, they are simply engaged in their daily round of meetings with clients, internal discussions, office politics, getting to work and getting home – all the things that comprise their routine. Many, probably most, are unaware of the true seriousness of the situation because even if they read or listen to the learned analyses, it doesn’t sink in.

The implications are too horrendous: not merely that one might lose one’s job, because that is a recognized risk that generally involves moving on to another one sooner or later, doing more or less the same thing for more or less the same pay. The idea that one’s job, one’s employer and one’s entire industry might disappear is not acceptable and hence is not taken on board.

It is rejected, denied, buried. Yes, 2012 is going to be tough, and yes, some people will lose their jobs, and some departments or units or companies will be closed.

But the system will survive, and most of the people in it will carry on as before.

That, for better or for worse, is the state of affairs as the financial crisis builds in intensity from day to day. For better, because if and when the insiders panic en masse, it’s game over. For worse, because if and when the crash comes, the failure to see it coming and take whatever preemptive action was possible will look absurd in hindsight.

The image that comes to mind is of the orchestra on the Titanic, continuing to play as the ship sank – with many of its lifeboats unlaunched or half empty.

landaup@netvision.net.il


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