OBAMA'S FIRST MISTAKE

WHEN WILL IT HAPPEN?

No doubt it will, and the anticipation is mounting.  But the idealization -- the glorification, in some places  -- is mounting as well.  Some can't wait for it to happen, some dread the moment, some believe it will never occur.  Obama, as Newsweek put, is "the one," inheriting the legacy of every great historical figure:  Lincoln, FDR, Kennedy.  We seem to need a Saviour right now, and he is the inevitable candidate.

He himself, I suspect, it too smart to go for this, and consciously we are too.  But I suspect we don't know how much we are coming around to buying into into it.  A number of pundits thought his choice of Hillary Clinton to head the State Department was the mistake, but that has died down amid the choruses of praise for most of his appointments.  More recently, his invitation to the evangelical minister Rick Warren to speak at his inaugural aroused a storm of protest among gays, but that too has died down, as we are reminding ourselves of the importance of tolerating a diversity of voices.  In one way, of course, Obama is showing really thoughtful leadership, but how long before he stumbles?  Or we allow him to stumble?  Or we want him to stumble?

Perhaps I am not the only one to have wondered if the widespread anxiety about his being assassinated masked an underlying desire for him to fall.  To be sure, inspiring and charismatic leaders have been assassinated, including, of course, Lincoln and Kennedy.  But it would be a mistake to underestimate the role of envy in politics, or simply the underside of idealization and hope.  In investing so much in Obama, we might wonder who are we protecting?

He will make mistakes, and we will be disappointed.  That simply can't be helped, and with so many overwhelming problems to solve it is likely to happen soon.  But it is not too late now to think about protecting him and us from the backlash of denigration and rage that will accompany those failures and, perhaps, spoil the realistic leadership he is able to offer us.

FRAUD AND REALITY

"Something is Happening Here"

Our minds are boggled by the recent scandals.   What is so hard to grasp is how Governor Blagojevich's could think his attempts to sell Obama's senate seat would not be uncovered?  How could Bernard Madoff's believe his 50 billion dollar Ponzi scheme could succeed.  Where is reality in this?

It is not as difficult to grasp how others are deceived by such acts.  The persistence of old perceptions and the desire to believe can easily override normal doubt, particularly in a group context where the group sets up norms to which members silently conform.  But how can the "perpetrators" come to believe that they will not be found out?  Are they sociopaths, without the regulating influence of conscience?  Are they in a state of manic denial?  Could they be psychotic?  Clearly, they seem to be narcissistic, but that is hardly enough to account for such extravagant misbehavior.

These are the kinds of explanations we tend to use to account for such individual acts of self-deception, but none of them seem to fit what we know about the personalities involved.  How does fraud lose touch with reality?

First of all, there must be something about our culture that supports such audacious gambles, such extraordinary ambitions.  We have seen again and again over the past decades a number of people who seemingly arise out of nowhere to possess great wealth and fame.  It has become something of a norm, and because we tend to assume that people are responsible for their own achievements and celebrity we discount the collective efforts that lie behind such accomplishments.  In effect, we encourage a kind of delusion about what it takes to succeed.  False expectations and standards are set up.

But while that may explain how such unrealistic expectations are established, how they become goals for many to aspire to, that is not enough to explain these scandals.  I suspect that what happened here is a more gradual process.  Each man, aiming for great success, no doubt, ventured to break the rules bit by bit, starting small and then venturing more as they found they got away with it.  A little graft, to test the waters, a little cooking of the books.

Their beginning successes, no doubt, then convinced them to venture more, to up the ante -- and that seemed to work as well.  At some point, they must have become convinced that the old realities just did not apply.  And it must have been that they found supporters and assistants who seemed to confirm their new beliefs along the way and they lost touch with or severed connections with those who might have challenged their judgment.  As they ventured further and further out on the thin ice, it did not break;  they became more and more confident.  Maybe the ice wasn't so thin after all.

Another analogy:  if you put frogs in a pot of cold water and then turn on the heat, the frogs will stay in the pot until they die.  There is no signal to warn them of danger, and so they stay put until it is to late.  Indeed, they may well be enjoying their warmer environment as they lose touch with it.  Similarly our consciousness can fail to warn us about a significant shift in our environment, until is too late to change.   

In both cases, it seem clear that there were warning signs;  suspicions were aroused.  Perhaps the lesson here is that others need to be more vigilant in following up the signs of fraud, but also that we need to be more careful to speak up in the presence of delusions.  Fraud of such magnitude requires assistance if not outright collusion.  It remains to be seen who will stand accused or convicted in these cases.  But it cannot be that these were simply individual acts.

HISTORY LESSONS LOST

THE ECONOMY

For two hundred years our economy has endured vicious cycles of boom and bust, huge surges of capital accumulation followed by devastating contractions.  This not only profoundly affected investors (formerly known as capitalists) but shaped the lives of workers and all those who supplied them with food, clothing and shelter.  Looking back, if there is one thing which we learned from this was the need for regulation and oversight.  The investors, too preoccupied with the lure of profit,  do not attend to that, and the workers, of course, too dependent on others, cannot change the course of events.

How did we forget what we have learned?  How did we neglect the lessons of our economic history?

Now as we are discovering this lesson all over again, trying to put into place the oversight and controls needed to manage this essentially unruly system, we need to think about why we forgot.  What we don't know we know is how investors cannot be entrusted with the job of overseeing the system.

There are I think two prominent reasons.

1) After the collapse of the Soviet Union, the ideology of the free market clouded our collective judgement.  More accurately, those who stood to profit from the expansion of business opportunities, deregulation, and privatization, used that ideology to inhibit any attempt to control their profits.  James Galbraith has brilliantly outlined how this happened in his new book, The Predator State.

2) Gradually we all became invested through pension funds, savings accounts, etc. etc.  As a result we too became blinded to the risk.  Those who took out subprime mortgages or home equity loans, those who ran up credit card balances, who overextended themselves in our new credit economy -- they all lost the objectivity needed to keep in mind our economic history and the risk built into it.

As Obama puts together his new economic team and as we individually struggle to get out of this recession, how can we work to remember what we so easily forgot?

Team of Rivals?

OR TEAM?

There is so much criticism of Obama's choice of Hillary for Head of the State Department - and of others in his new team. Many believe he was influenced by Doris Kearn's book about Lincoln's cabinet, and very possibly he was. There is an argument to be made for keeping one's rivals engaged and close to the decision making process. On the other hand, rivals can and often do fight to the death, or at least undermine their leader.

The key is strong and determined leadership -- and that may be what Obama has confidence in being able to assert in bringing such powerful people into his cabinet.

There is another precedent and analysis that is relevant to this discussion: the role of Kennedy’s advisors in preparing for the disastrous Bay of Pigs invasion, and a few months later their response to the Cuban missile crisis. As analyzed by Irwin Janis, the Yale Sociologist, the team of advisors went way off course by virtue of “groupthink,” a process in which differences and debate were silenced and a consensus emerged without adequate testing. The next time around, as Soviet ships carrying missiles to Cuba approached, Kennedy encouraged vigorous debate in his team, a process that allowed him to think the problem through more thoroughly and arrive at an effective solution.

The team that Obama is putting together is very strong, a group of capable and independent thinkers – every bit as strong as the team Kennedy had around him over 45 years ago.  Obama appears to have confidence in his ability to tolerate conflict and dissent and to learn from it. Bush is notoriously conflict averse, no doubt a key reason he allowed Chaney essentially to take over his administration by operating behind the scenes and suppress dissent. Obama may see the benefits in the frank and full display of opinions as the run up to good decisions.

Maybe he wants a real team.

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.