Taking it to the streets
Monkeys are stupid. To rule monkeys, you need little more than food and entertainment. Panem et circenses.
Take Wall Street. A free market is mass monkey chatter. Short-term entertainment, represented by the DJIA, dominates any passing monkey awareness of financial markets. Monkey brains, optimized for narrative-based associative storage, are unable to actually comprehend the jungle of information contained in mass monkey talk. Monkey brains, however, can understand the limbic, primal nature of pleasure and pain. Bears and bulls provide a convenient compression algorithm for shoe-horning short term market noise into tiny monkey brains.
The bailout being contemplated by the Alpha Monkeys may be sufficiently dramatic enough to keep market participants entertained enough to prevent a liquidity crisis. However, there are severe unknowns in today’s market. No one has ever tested the theory of mass securitization during a systemic level panic. Whether risk is distributed enough to prevent cascading market failure may be a dubious proposition. The failure of the sub-prime market to spread risk around is not a promising precedent. In some respects, it seems as if securitization concentrated risks instead of distributing them. It may be possible to create a domino with airbags but in the end it’s still a domino and dominoes, when pushed, fall over. What happens when we start hitting the more abstract derivatives? Warren Buffet has been worried about derivatives for years, calling them “financial weapons of mass destruction”; when Berkshire Hathaway bought reinsurer General Re, one of the first things they did was unwind General Re’s derivatives business. Now we get to watch for the mushroom cloud.
A bailout may keep Wall Street entertained but, as Benjamin Graham pointed out, in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine. A bailout as theater may be sufficient if economic fundamentals are sound. Many of the great financial entertainers from Alexander Hamilton organizing the first bailout at the dawn of the Republic to J.P. Morgan acting as a de facto proto-Fed, have mitigated the effects of liquidity crises through great financial theater. The depths of the Great Depression, on the other hand, may have been brought on by Herbert Hoover’s bad stage presence. However, as we approach the end of the post-World War II macro-bubble, even if Ben Bernake and Hank Paulson were great actors (and they aren’t) there may be no entertaining ourselves out of this hole.
If the narrative fallacy posited by Nassim Nicholas Taleb is true, monkeys may not have the brain capacity to absorb all of this. The human mind may not penetrate the fourth quadrant. The only comfort that the narrative fallacy provides is that monkeys should be able to come up with a comforting moral fable afterwards. History, as Nabulione Buonaparte remarked, is a fable agreed upon. As the sky falls in, maybe the fables we concoct will be of some comfort.
That will keep the monkeys in line.
