Post-Meltdown Stress: Are we hooked on Depression?

Why did no one see it coming? That was the question the Queen of England posed to Professor Garicano of the London School of Economics in November 2008. The British monarch wanted to know why the early warning systems failed to alert anyone to the impending global economic crises.

Trying to assure her that indeed, the crises was not as unforeseeable as some might think, the distinguished academic replied that almost everyone missed it because they had transferred their duty of supervision to others. ‘At every stage, someone was relying on somebody else and everyone thought they were doing the right thing.’ We had abdicated oversight to our neighbours and the buck just kept passing along.

Interestingly, the professor never meant that no one saw the crisis building up. People did. What he meant was that a lot of people saw the dark clouds forming, but decided that since no one else was raising an alarm, it might be a mirage. Why spoil the party? Nobody wanted to be branded for crying wolf at the sight of a puppy. Not a single person on that the lending chain that sparked the credit crises had the courage to speak up. Hear him:

Mortgage agents generating loan requests in exchange for a nice commission; banks granting the loans they knew they could package and pass on; rating agencies (those in charge of pulling the plug here) giving high ratings to products they could not understand on dubious assumptions based on 12 years of data; and, most worryingly, asset managers (pension funds etc.) buying these securities because if they did not, they would underperform their peers and risk being fired.

With that kind of universal complicity who would dare raise the alarm?

The reverse may now be true. In the past few months, we have seen signs of a nascent recovery. However, since hardly any authoritative voices in economics and finance have called the definitive end of troubles, we are all still cowardly huddled in the bomb shelter. Our new motto is wait-and-see.

But raising the alarm over a pending crisis and rebuilding confidence after one takes different sets of skills. In the former case, one cries ‘Fire! Fire! Run for the exits.’ In the latter one reassures listeners with the calming words, ‘It’s okay, relax.’

Some would argue that no one is screaming that the building is still on fire today. That may be true. Yet everywhere you turn, on the TV, in the papers, at seminars and on the Internet, our obsession with the fire is overwhelming. ‘It was 1000◦c.’ ‘It consumed a whole metropolis.’ ‘It took many days to put out the fire.’ ‘The fire claimed many lives.’ ‘It was the worst fire in history.’ The list of pained memories goes on. We are so fixated on analyzing the causes of the fire that no one has noticed that it is dying down.

This time around, because it is now fashionable for academics, journalists and economists to talk up and write of the crises, it is counter-trend to announce that the tide is turning. Only last month, Portfolio.com published a story with a title fit for any hedge fund mogul or private equity grandee (‘Masters of the New Universe,’ by Suzanne McGee). Instead of the usual Wall Street suspects, the story covered the top economists who had forewarned of the crises and their new found saloon lion status. Many others aspire to join that hallowed fraternity. How else to do so than to lip-sync the original doomsayers creating their own daisy chain?

In spite of the steady recovery recorded by global markets in recent months, the general mood remains dour. Investors who rush to take their profits at the least price surge are nervous and unconvinced about the sustainability of the momentum.

It is an irony that while markets are making a tentative recovery, economies could suffer an extended trauma. In the same way we missed the pending crises in the spring of 2007, we could be missing the spring of recovery in 2010. All because we are waiting for someone else to say the crises is ending.

The reverse of the old anecdote about selling off one’s shares when the shoeshine boy starts to give lectures on investment is worth remembering. When taxi drivers, waiters and doormen all start to make recommendations for dealing with the meltdown, then we know the storm may be over.

For more than two years we have over-gorged on steady diet of panic, angst and downright fear. We have had enough of the distressing headlines that leap out of the page and screen at us. Optimism deserves some air time too. It is time to kick the depression habit.

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