by flory
I've been fairly astonished, since the onset of The Great Financial Meltdown of 08, at the inability of supposedly very smart people -- starting with Easy Al Greenspan -- to distinguish between the organizations that employ people and actual breathing human beings.
Now we have David Brooks weighing in. (Okay -- there's no actual evidence that Brooks is a smart person. Work with me here.)
Economic models and entire social science disciplines are premised on the assumption that people are mostly engaged in rationally calculating and maximizing their self-interest. But during this financial crisis, that way of thinking has failed spectacularly. As Alan Greenspan noted in his Congressional testimony last week, he was “shocked” that markets did not work as anticipated. “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”
Why is it so hard to understand that the self-interest of organizations, and the larger economy of which they're a part, and the self-interest -- short term at least -- of the people who work in them aren't necessarily the same? And its not "organizations" that make decisions. People do. And the people within the banking system have been making rational decisions -- entirely in their own self interest -- at every step of the way. That's been at the heart of the problem.
There has been tremendous short term upside, and no downside, for the individuals that have put their companies, and the economy, at risk. They've made enormous personal profits. And they'll be able to keep those profits regardless of what happens to their companies or their clients or the country. Their wealth will cushion them from much of the fallout of their decisions. Job loss, healthcare, credit squeeze...all of these are pretty well non-events once you've put a couple tens of millions of dollars away.
Brooks goes on to talk about 'perception', or maybe misperception, as the driving force behind the economic meltdown.
Traders misperceived the possibility of rare events. They got caught in social contagions and reinforced each other’s risk assessments. They failed to perceive how tightly linked global networks can transform small events into big disasters.
In a word - No.
Does he really think traders sit at their desks on a random Monday and worry about tightly linked global networks? Or Black Swan events? Traders sit at their desks and worry about how their positions will change over the course of the next day, or even the next hour. Next Friday is 'the long term' to a trader. They don't invest, they "trade", hence the name. And to the extent that global networks and black swans shake up the markets, traders can make money. Which is the only perception they worry about.
All of this is to say you don't actually need behavioral economics -- the topic of Brooks column -- to explain away what happend to the economy. Old school, traditional economics explains it perfectly well. People made a whole bunch of perfectly rational decisions that maximized their short term economic gains. There were serious negative externalities builit into these decisions. The people making the decicions, and the money, don't pay for those externalities directly, so they don't worry about them.
Then the economy goes into the shitter, changing the political landscape, and the country as a whole doesn't have to worry about 4 years of McPalin.
Hey!! An upside!!
A lot of rumors in current in Conservativeland involve the idea that secret "internal polls" show the presidential race close or even tied. The McCain people are 
