CHECKING YOUR PORTFOLIO - OR NOT

What You Don't Want to Know

Countless numbers of people in the past few weeks have confessed to me they are not able to look at their balance sheets.  Mostly these are not professional investors -- but the list does include several portfolio managers I see regularly.  They can review their client's positions, of course, particularly when their clients call up in panic, but they can't seem to look their own losses in the eye.  Why?

Obviously bad news is unwanted.  On the other hand, little is to be gained from ignorance -- and more can be lost.  I think that when people confess to avoiding the facts, they are relying on this common sense idea that the news is just too painful to bear.  But if we dig deeper there are other motives, several in fact.

An obvious one is that knowing the extent of the damage creates a demand for action. It reminds people that they could do something about it, that they have the ultimate responsibility to act on their own behalf.  In many cases, though, this responsibility can be more frightening than simply accepting the loss, especially if don't let yourself know exactly  how much of a loss it is.  Vagueness and uncertainty can be preferable to feeling incompetent or irresolute.

Then there is the defense of optimism.  We can deny the fact of the damage or the extent of our losses if we believe that it will all work out in the end.  Markets go up and then they go down -- and then they go up again.  And our recent history seems to confirm that fact, along with the fact that when they go up again they eventually go up even higher than before.  All you need is patience -- sometimes a lot of patience and enough cash to wait it out.

I think there is a third and less obvious hidden motive here:  solidarity.  When someone confesses he hasn't looked at his portfolio, he is letting you in on a secret, assuming a certain complicity.  The hidden message is that "we are all in this together." It is a version of the fellow feeling that accompanies natural disasters.  We feel closer to each other because we share a common misfortune.  It is not so much that we help each other out, though we sometimes do.  It is that sharing the experience makes the world feel less alien -- at least that portion of the world that includes you and me.  There is a comfort in belonging to a larger whole.

These motives contradict the notion of a market driven by rational interests.  At least they modify it significantly.  Moreover, collectively, they suggest the power of inertia to curb the precipitous decline of markets.  As a psychologist, I would not begin to know how to calculate the effect on prices, though I am sure that armed with decent survey data someone could.  But it is obvious to me that markets would collapse even more thoroughly than they do were it not for the investor forces of avoidance, denial and shared misery.  

That may be bad for the individuals who do not act, but it may be good for us all.

UPDATE ON RACISM IN THE ELECTION

WHAT HAPPENED?

It did seem as if the so-called "Bradley effect" did  not come into play in the election after all.  Why?

Leaving our of account the possibility that there really is no "Bradley effect," no racism in our electoral politics, which seems impossible to accept, given the ubiquity of racism in our culture, what happened to our racism in the polling booth?

Benedict Carey argued in The New York Times on November 7th:  the election illustrated that  "mutual trust between members of different races can catch on just as quick, and spread just as fast, as suspicion."  Clearly we would like to believe this -- and there is some truth to it.  

On an individual level, person to person communication goes a long way towards mitigating prejudices.  But to a very large extent, racism is a group processes that involves the identities of group members.  One can hold to virulent racist views and still like and even enjoy friends who fit into those categories of  hate.  It isn't even that people make exceptions so much that these are two different types of experience, the experience of the personal and the experience of one's identity group.  They can exist side by side.

I know this from my own experience.  My father was an anti-semite who grew up in post-WWI Germany, but he loved and admired my jewish wife and he adored his jewish grandchildren.  No conflict, no contradiction -- except, of course, for me.

Obama, of course, never became a "friend" to the electorate, never established a personal relationship.  He was and remained "Black."

What happened, I think, is that over the course of the election he lost his strangeness. Repeated exposure in debates, interviews, advertisements, public appearances made him familiar to us, less threatening.  To be sure, many remained "uncomfortable" with him, as they said, but many more lost their feeling that he was too different to understand.  And, then, increasingly, Palin and McCain himself became strange, impulsive, intolerant, negative.

The process was a good example of how consciousness can, over time, and in the right circumstances, override unconscious prejudice.  

Thank god!

CREDIT

THE NEW CONSENSUS

The speed with which a consensus has emerged about the underlying cause of our current financial crisis tells us that it was something we knew all along – but didn’t let ourselves know we knew it. The unwanted truth now is clear: we have been spending beyond our means. It was not just homeowners taking out mortgages they couldn’t pay for and consumers running up astounding levels of credit card debt, it was banks, hedge funds, mortgage companies, investment firms and governments that discovered how easily the traditional limits of debt could be ignored.

This presents as an economic problem, to be sure, but fundamentally it is a problem of mass psychology. Beliefs become validated as truth when opposing ideas became silenced or disparaged, when they become the only ideas that can be espoused without the fear of ridicule. Two forces contribute to bringing this about: the desires that pull people into convictions they want to believe, and then the fears that drive people away from alternative ways of thinking – the fears that rule out the doubts that might otherwise cross their minds. If everyone believes something is true – or appears to -- how can you stand up against it?

In this case, of course, the clear desire was for more wealth and more purchasing power. In a consumer society who could object? The consumers purchasing more goods and services? The manufacturers expanding production? The merchants increasing sales? And then the American dream of home ownership was activated for those at the lower end of the economic spectrum. The ambition to acquire great wealth and status kicked in at the top.

Moreover, after the defeat of communism, other ways of thinking became proscribed. The victorious ideology of the market silenced critics who thought markets needed to be monitored or regulated. Even Alan Greenspan in his recent congressional testimony now admits there was a “flaw in his ideology.” His faith in the market’s ability to self-correct was too great.

Realizing that government could not afford to sustain basic levels of security for all its citizens, we created an Ownership Society in which everyone could aspire to the goods and services they wanted. We didn’t cut back on our desires, we simply found a new way to pay for them. Leveraging assets, borrowing from abroad, hedging bets, bundling and securitizing debt, we created an alternative to the defunct promise of the Welfare State. Once, people were worried about being in debt, but now debt now became normal, even a source of profit. No one would be left out of the opportunities that debt created. We persuaded ourselves that the risks could be safely managed -- and democratized.

It became our biggest bubble ever – and no one raised a warning cry. To be sure, doubts were expressed about the housing market, and concern about the credit swaps, but no one thought it would led to the disaster we now face. And yet, in retrospect, it is all too clear.

But no amount of correction and reform learned from the lessons of this disaster will protect as against future bubbles. We continue to be vulnerable to the hopes and fears reflected in Mass psychology.

Panic

WHY IT HAPPENS AND WHAT WE CAN DO ABOUT IT

Stocks are plunging. Investors can't fulfill their commitments to buy. Borrowers can't pay back loans. We have come to call such conditions in the financial markets "panic."

What it means is "sudden, uncontrollable fear or anxiety," and that fits current conditions. It has come upon us quickly, catching us off-guard. Moreover it seems that events outpace us; no matter what we do, we can't catch up. But if we look more closely at the definition, we see that it is the fear or anxiety that is out of control, not the events themselves. Indeed, we often enjoy the thrill and the challenge of fast-paced, unexpected change: skiing, running rapids, hockey games. What makes the difference with panic is that uncontrollable anxiety destroys the capacity to think. People panic when they lose their minds.

Markets too. In the midst of seemingly chaotic change, the group of people that makes up a market becomes stunned, paralyzed -- or they resort to stereotyped and ritual acts that only make things worse. In short, the group has lost it leadership, the voices of those who provide guidance and direction, the minds those who can still think about appropriate responses.

We see that all too clearly today. Last week's $700 billion bailout did very little to stem the panic. It was cobbled together as if mere action on the part of government itself could restore confidence. The more recent concerted action of European finance ministers and heads of state stands a better chance because, for one thing, it is concerted action. In a globalized economy, one country's actions alone is insufficient -- a lesson one might have thought we might have learned from the Iraq War.

The second thoughtful aspect of their plan is that it addresses directly the problem of assets and liquidity. Rather than simply buying up debt and hoping the market will do the rest, it pumps capital into the market, shoring up the institutions so they can function while at the same time giving government new control over their management. This counters the ideology of the free market, of course, but it addresses the reality of what is happening.

So we are beginning to reclaim our minds. Maybe we can then rebuild our bank accounts. What we don't know we know about panic is how dependent we are on leaders who can think.

"Greed"

NO LONGER GOOD

Greed has now become the preferred explanation for the Wall Street debacle. John McCain and much of Congress have joined in the chorus. There is no doubt that there are huge disparities in wages and bonuses between those working on Wall Street and those working elsewhere, and many have said to me in recent years that the compensation and profits made from hedge funds and investment banks are "crazy," "obscene," "unfair," etc. That has been true for some time. But why is this being called "greed"? And why now?

Standing back from the events of the last month makes it clear how many factors contributed to the crisis: the mortgage lenders who saw only more business for themselves, the investment banks who packaged the securitized debt, the investment advisors following the herd, the regulators who stayed on the sidelines, and, of course, the poor suckers who took out loans they couldn't pay. So we need someone to take the hit.

But it is not just the complexity of the problem that leads to this search for oversimplified explanation. We don't want to know how flawed and how risky our financial system is -- at the point when "free markets" and triumphed and all out pensions, health plans, college funds, and savings are invested. We want to believe that we should be secure. And if it turns out that we are not as secure as we thought, that risk has not been managed down to a negligible factor, someone must be to blame.

Gordon Gekko is famous for suggesting that greed is good. This is our revenge. Not only is greed not good, he himself and his ilk are bad. They let us down.

Health Insurance for Wall Street

Lehman Brothers appears to be in its final throes, and the big question on front pages now is whether the government will intervene. A few days ago, of course, it rescued Freddie Mac and Fannie Mae – though the drastic treatment the mortgage giants got will compromise their quality of life for years to come. Six months ago, Baer Stearns went through a comparable life-saving operation. There are reports of other financial firms setting off red alerts.

[CHECK OUT BELOW: ANOTHER SACRED COW - DEREGULATION]

At a time when markets are so interrelated and so many other institutions and individual investors have so much at stake, this may be the right thing to do. But more and more it does begin to seem that Wall Street is covered by a large and loose insurance policy. Some firms are just too big to be allowed to fail.

The mind thinks by analogy and metaphor, so here is one that comes to mind: Frannie Lou (I made the name up) lost her job at the moment she was diagnosed with cancer. As she was the family’s sole breadwinner, her 3 children face a bleak future. Food stamps will feed them, but she is behind on her mortgage, owes money on her car, and is scrambling to get child care. Without insurance, what will they do?

My example of Frannie Lou may not be the best analogy, but it is good enough to suggest how ordinary people are likely to perceive what is happening on Wall Street. Obviously, the collapse of Lehman Brothers would throw its 24,000 employees out of work, while Frannie Lou’s catastrophe affects only 4 or 5; the aftershocks of a Lehman collapse might destabilize our financial markets, while the collapse of Frannie Lou’s world would agitate and depress only her family and friends, and perhaps some others who would see in her fate an image of their own. To be sure, the employees and shareholders of Lehman will endure substantial losses, but the ordinary citizen, perceiving such an analogy, might well conclude cynically that government is only about the big and powerful – if our ordinary citizen hasn’t already made up her mind about that.

But what actually is the difference? Can it be explained, and who will bother to explain it? Usually such questions are characterized as matters of PR or “spin.” But what is “insurance” anyway? And who does get to decide who or what is insured? There is substance in the questions raised by analogy.

What we don't know we know about this is that there is an active under-life to such decisions and actions. They reverberate in our minds as they are assimilated, as people try to make sense of them. And this is where our political process enters into the picture. We need our leaders to shape our thinking and guide our responses. And we need to reflect on the kinds of leaders we need. How they answer such questions will help us to decide how useful they are.

The Other Side of Racism

PALIN IS NOT A STRANGER

Whatever has been said -- and whatever may be said -- about Sarah Palin as McCain's choice for VP, she is not a "stranger," some one who is unfamiliar and frightening to us.

On the contrary, her small town background and small town virtues, her pettiness, her limitations, even her go-go boots, are all too familiar. We may be worried about her lack of experience. We may be embarrassed about her views. But we know who she is.

This brings up the fact that we do need to be able to idealize our leaders -- at least to some extent. We do not want them to be too foreign, but at the same time they have to be better than we are. This is the other side of racism.

Perhaps this is my McCain's "gut" urged him to choose her, the antidote to the "stranger.' But what we don't know we know about such a choice is that to trust someone we have to think they are at least a little bit better than we are.