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