A Hard Look at Psychology and the Financial Crisis – Ian Hughes

Leverage Ratios of Investment Banks Increased ...

Leverage Ratios of Investment Banks Increased Significantly 2003-2007 (Photo credit: Wikipedia)

Lehman Brothers Rockefeller centre

Lehman Brothers Rockefeller centre (Photo credit: Wikipedia)

Introduction

I would like to thank Dr Alf for letting me write this guest blog article. I responded to one of Dr Alf’s blog’s and he invited me to expand my views.

The article is based on my forthcoming book entitled “Imperfect Design: How Our Psychology Threatens Our Future”, and my blog based on the book which is at www.disorderedworld.com

Let me know if you have any suggestions or improvements.

Moral Defects in the Financial Machine

The movement against war is sound. I pray for its success. But I cannot help the gnawing fear that the movement will fail if it does not touch the root of all evil – human greed.

Gandhi

Neoliberalism as Ideology

The story of the Financial Crisis is not simply a tale of the misdeeds of a few greedy bankers.

It is the story of how, for forty years, neoliberalism provided psychopaths and people with narcissistic disorders with the smokescreen they needed to rise to positions of influence in global financial organisations, to loot those financial institutions with the support of governments, and ultimately to bankrupt the Western financial system.

History has many examples in which ideology has played a crucial role in helping pathological groups rise to power. To be effective for this purpose, an ideology must resonate powerfully both with the mass of psychologically normal people as well as with the personality-disordered minority. Neoliberalism was such an ideology. Its messages of individual freedom and economic growth resonated both with pathological elites, and with many ordinary citizens around the world.

Political scientist Manfred Steger has outlined how neoliberalism’s central claims, together with the historical context in which it arose, made it such a powerfully attractive creed:[1]

  • It presented all governments –including democratic governments – as a threat to individual liberty.
  • It promised that the triumph of free markets over governments would strengthen freedom and democracy.
  • It insisted that the triumph of markets over governments was inevitable and that there was no alternative.
  • It claimed that neoliberal economies were self-regulating and were best left untouched, and
  • It claimed that the alchemy of neoliberalism would transform greed into gold for all.

Like all powerful ideologies, neoliberalism was based on partial truths. It resonated with ordinary people because it promised prosperity, democracy and freedom. It resonated with working people’s dreams of becoming rich and escaping economic hardship. It also resonated powerfully, however, with those with dangerous personality disorders for whom greed and exploitation are the core of their nature.

According to Robert Hare, psychopaths make up around 1 per cent of the population. This proportion is such that most of us will come across at least one psychopath during a typical day. Those with narcissistic personality disorders make up a similar percentage of the general population. Although always present, the influence of this minority waxes and wanes as the environment encourages or deters their emergence. The amoral culture cultivated within the global financial system actively encouraged their emergence.

Psychopaths and narcissists exhibit tremendous energy and push extremely hard to get what they want. They are profoundly competitive, are adept at self-promotion and have a talent for seeking the limelight. They thrive on their confident, aggressive delivery style which more than makes up for their lack of substance. Financial institutions found these confident, assertive personalities extremely attractive. One study of 200 high-potential executives found that 3.5 per cent fitted the profile of the psychopath[2] – three and a half times higher than in the general population. All of the individuals identified in the study had traits of the manipulative psychopath: grandiose, deceitful, irresponsible, lacking remorse and devoid of empathy.

Enabling Environment

In the absence of psychological testing, it is impossible to say that any particular individual suffers from psychopathy or narcissistic personality disorder. It is possible however to say that a culture is pathological, and the evidence shows that a critical number of psychopathic personalities were at work in shaping that culture. In ECONned Yves Smith summarised the environment that evolved within financial institutions as one characterised by weak or absent regulation; where supervision is inherently difficult because high levels of responsibility are devolved to even relatively junior employees; where huge incentives fuel a highly aggressive competition for promotion; and where hiring and pay practices incentivise short-term focus, rule-bending and aggression[3].

The pathological culture in financial institutions has been graphically described by many former employees. Former Morgan Stanley employee Frank Portnoy relates how the aggressive environment he worked in made him ‘crave the sensation of ripping someone’s face off[4]’. He recounts one colleague as saying, ‘You have to be a criminal to be good at this business.[5]’ Former Goldman Sachs director Nomi Prins has admitted, ‘To retain supremacy, banks had to prey upon their existing and emerging corporate clients…’[6] And former CEO of Morgan Stanley John Mack was known for his mantra, ‘There’s blood in the water, let’s go kill someone.’[7] One employee of derivatives trading firm Bankers Trust was caught on tape saying that the firm’s objective was ‘to lure people into the calm and then just totally fuck ’em.[8]‘ This aggressive, predatory, greed-without-consequences culture was the perfect environment for pathological individuals to thrive.

Little Has Changed

The crisis has changed little. Following bailouts costing billions of taxpayers’ money, there is little evidence that the predator culture in the financial industry has altered. In 2010 New York Judge Jack B. Weinstein declared during a trial involving financial fraud that the evidence presented ‘laid bare the pernicious and pervasive culture of corruption in the financial services industry… Supervision is seriously negligent; greed and short-term gain are so enormous that fraud and arrogant disregard of others’ rights and of ethics almost encourage criminal activities…[9]’ In 2012 Goldman Sachs executive director Greg Smith resigned publicly in a letter to the New York Times stating that the environment in the firm was as toxic and as destructive as he had ever seen it. He described a culture in which management encouraged employees to rip off the firm’s clients, who they regularly referred to as ‘muppets’. ‘Today, if you make enough money for the firm (and are not currently an axe murderer),’ Smith wrote, ‘you will be promoted into a position of influence.[10]

Economist David Harvey has written that a new global economic order is urgently required, based on a nobler concept of freedom and a worthier system of governance than those that currently underpin financial capitalism[11]. The development of a fair and ethical global economic system, capable of addressing the needs of the majority of humanity, will clearly not emerge, however, as long as narcissists and psychopaths continue to write the rules.


[1] Manfred Steger, ‘Globalisation and Ideology’ in The Blackwell Companion to Globalisation, 2007

[2] Paul Babiak and Robert D. Hare, Snakes in Suits: When psychopaths go to work, Harper, 2007:193

[3] Yves Smith, Econned: How unenlightened self-interest undermined democracy and corrupted capitalism, Palgrave Macmillan, 2010:171

[4] Ibid:150

[5] Ibid:134

[6] Quoted in Yves Smith, Econned: How unenlightened self-interest undermined democracy and corrupted capitalism, Palgrave Macmillan, 2010:135

[7] Quoted in Paul Mason, Meltdown: The end of the age of greed, Verso, 2009:4

[8] Ibid:129

[9] ‘Pervasive Culture Of Corruption in the Financial Services Industry’ Cited By Judge In Sentencing Ruling, Steven Meyerowitz, Financial Fraud Law, 01/26/2010, http://www.financialfraudlaw.com

[10] Greg Smith, Why I am leaving Goldman Sachs, New York Times, 14 March 2012

[11] David Harvey, A Brief History of Neoliberalism, Oxford University Press, 2011:206

 

 

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12 responses

  1. Pingback: My Top Twelve Blogs – Last Three Months « Dr Alf's Blog

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  4. Thanks for your comments. I agree completely that greed and psychotic behaviour are as old as time. In fact the premise in my book is that for most of history the conditions were such that people with dangerous personality disorders, including psychopaths, held power over the psychologically normal majority of humanity. In recent centuries we have begun to devise ways of wrestling power from their hands. The defences we have developed include: the rule of law, electoral democracy, human rights protections, social democracy, the separation of church and state, and cultures of tolerance. If you are interested, I give more details on the context for this article on the Financial Crisis on my blog http://www.disorderedworld.com

  5. Greed, psychopathic behavior, swindling the public, overcharging businesses and trying to capture
    all power and wealth for oneself or a tiny minority of henchmen is not new and not peculiar to neoliberalism or any other system.

    They are things which have been with us since the beginning of time and are part of the human condition.
    So whilst Ian Hughes is right about the psychological makeup of the so called “Masters of the Universe”
    his analysis does not look deeply enough at the causes and some of the solutions.

    Greed and psychotic behavior as old as time itself
    ——————————————————————
    Buddha counselled against the rapacious greed which was prevalent in his day, some 2,500 years ago, Christ did the same thing 2000 years ago and Atlantis and Lemuria were destroyed in a World War many thousands of years before that over the same things–power and wealth driven by psychopathic leaders who saw themselves as Gods who could do anything.

    The Almighty gave us all free will but he was careful to give us the 10 Commandments as well,because he knew just how bad some of us could be.

    Other traditions from around the world have similar bodies of rules to govern human behavior but in the world of the psychologist, agnostics, secular humanism and certain other traditions good and evil are often regarded as abstract concepts which do not apply to them or as very ancient ones with no relevance to today’s situations.

    Regulation not up to the task
    ———————————–
    The problem illustrated by Ian Hughes is that the civil servants and regulators and the politicians are simply not equal to the task of devising a regulatory environment under which the City and financial institutions can make money,do their essential work, yet at the same time do it in such a way that people of a rapacious and psychotic nature are simply not employed in these roles in the first place.
    In the case of civil servants this is due to their middle class backgrounds and lack of understanding of the needs of business/the economy and how ordinary people think and live.

    This coupled with a lack of understanding of human nature as it really is when at its worst makes them and the regulators create regulations which allow swindlers ,scoundrels and immoral and atavistic people into positions of power and influence in our banking and financial system.

    Politicians, often of low intellectual quality and scant understanding of the difference between right and wrong see the public as “muppets” to be fleeced via the mechanism of expenses, the latest manifestation of which is the use of their children to inflate their expenses.

    They are guided by short term electoral considerations, are often corrupt and therefore unable to devise effective regulation.

    People not taught a personal philosophy /the meaning of right and wrong
    ———————————————————————————————
    In the past people were so taught and moral relativism did not exist in the way it does now.
    Great leaders like Marcus Aurelius the Roman Emperor featured in the opening scenes of the film Gladiator,Frederick the Great of Prussia, Oliver Cromwell who refused a Royal bribe of £20,000 gbp in the 1600,s(many millions in today’s money), all had a sense of right and wrong and of civic duty which enabled them to set examples which people could follow.

    Today we have politicians who are experts at lying,psychological manipulation,sophistry and skulduggery and a culture of ambulance chasing,suing everything that moves,”lets be having it now”,”someone else will pay”, that pervades everything else.

    In this world of winner takes all ,personal responsibility does not exist,there is no need to deliver an honest day’s work and if there is an accident it must be someone else,s fault and therefore actionable,if there is money to be made then it must be ,regardless of cost or loss to others.

    No proper example
    ————————-
    Thus at every level everyone at a young age upwards learns from politicians,regulators,civil servants,failed and failing CEOs, quango heads, NHS Trust managers, colleagues and the media that “Greed is Good”,lying is acceptable, useless performance is to be richly rewarded and that the only rule that matters is do not get caught.

    Add it all up
    —————-
    With this heady brew of lax recruitment practices, poor /indifferent regulation, no proper example of how to behave, people not knowing the difference between right and wrong it is hardly surprising to find that those at the top of the financial and banking system and those who instruct them exploit this situation for their own gain as they did in the most recent globally engineered financial collapse, the Cypriot “haircutting” and their future plans for currency implosions and crises.

    • I agree absolutely that greed and psychotic behaviour are as old as time. In fact the premise of my book is that for most of history, people with dangerous personality disorders have held power over the psychologically normal majority. In recent centuries we have begun to figure out ways in which to wrestle power from their hands. The defences we have been building include: the rule of law, electoral democracy, the separation of church and state, social democracy, protection of human rights, and cultures of tolerance. Where these safeguards are absent, the opportunities are greater for pathological individuals and groups to take control. If you are interested, this wider context is explained more fully on my blog http://www.disorderedworld.com

    • John,

      Many thanks for this interesting response.

      I agree that psychology is just one dimension of analysis. Neoliberalism has extensive research in the field of economic history. By adding the dimension of psychology, there are opportunities to reflect on the behavior of keys individuals in neoliberal history, like Reagan, Thatcher, Clinton, Blair, Brown etc., plus the personalities that have dominated financial institutions like the IMF. Sadly, Cameron missed the opportunity to lead Third Wave Neoliberalism.

      Another whole dimension is the political perspective from different vantages of the neoliberal history

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