Bill Clinton’s chief campaign advisor back in 1992 achieved immortality (Bill reserving the immorality space) by coining the phrase “it’s the economy, stupid”, thereby getting everyone focused on what truly mattered in getting Hillary’s husband elected.

Something similar has been playing to full audiences in recent months, best described as “it’s all mental, stupid”.

This is not strictly true.

Going bang in the night

A lot of things went bang in the night, never to be seen again, such as $4-trill in financial assets, $6-trill in global output forgone, millions in houses foreclosed, tens of millions of jobs around the world, numerous banking institutions, half all hedge funds, many otherwise good businesses, besides half global equity market and pension values.

So it wasn’t as if the body count was low in this particular encounter. To the contrary, it was extreme.

Yet throughout this traumatic period it was obvious emotional distress played centre stage, with enormous panic taking hold where previously exuberance and resulting hubris had ruled for many years.

Thus the extremes in the human condition had again taken us from triumph to despair, as usual in an instant, as trust dissolved and paranoia took over. Though it needs perhaps to be stressed how modern communication technology facilitated such information transfers like never before, greatly reinforcing the resulting extremes (something to be remembered for the future?).

This constant in human reality had not been lost on many important observers. Classical commentators such as Hyman Minsky and Charles Kindleberger had many decades ago analysed earlier occurrences of these recurrent phenomena in great depth, but they were mostly relegated to the backwaters of financial history, and ignored where it apparently mattered.

Darker irrational sides

Nobody likes to be reminded of the darker irrational sides of our personalities, apparently at all times wishing to believe we are fully and rationally in control of events (which presumably also explains why there are so many children in the world).

Modern finger-wagging commentators include George Soros, Nassim Taleb and Robert Shiller, amongs others.

Soros favours a concept akin to the Lucas Critique according to which people change their behaviour as policy changes, rationally discounting and adapting to the likely consequences.

In Soros’s view, market impressions of changing conditions drive financial values, which outcome further reinforces perceptions and thereby shapes actual financial conditions, which feeds back into perception, until views about reality have become badly distorted, and asset values no longer reflect true economic fundamentals (at which point sudden wrenching adjustment becomes possible, thereafter distorting perceptions and reality in some new way).

Nassim Taleb emphasized the essential uncertainty of life as events may occur completely outside our frame of reference and thereby upsetting all our assumptions and positions, in the process setting in motion terrible panics as corrections take hold.

Robert Shiller focused on emotion in economic and financial behaviour, famous for putting irrational exuberance on the map, in stock, bond, property, commodity and their derivative markets.

Along with George Akerlof, Shiller this year published a book “Animal Spirits”, revisiting the old Keynesian idea of such mental processes driving economic activity, especially risk-taking, recognized as central to market capitalism for centuries.

World in a trance

When mankind is caught in a time wrap, especially when things are going swimmingly, the hubris is difficult to overcome and people are caught up as if in a trance.

In deepest despair, a similar kind of mindset tends to take charge, again increasingly colouring perception of reality with only one hue and refusing to snap out of it.

In either extreme, the mental condition has lost balance. Its assessment ability has been impaired, taken over by either extreme confidence or deepest skepticism. Either is realistic at a particular point of time, but is not necessarily sustainable as future events unfold.

According to Alan Greenspan, such extreme ranges (of hope and fear) in the human condition are difficult to overcome. They are wired into our DNA. Under reasonably controlled circumstances, these features are a great boon in driving our behaviour (confidence in overcoming hurdles, but also skepticism preventing blunders).

But our human condition doesn’t maintain such balance. Instead, learning and experience causes us to adapt our worldview. Thus, success reinforces confidence just as terrible disappointment feeds yet more skepticism.

Until prolonged exposure to contrarian experiences shakes up our convictions once more, making for a restoration of a more realistic balance, though hardly for long.

Given these descriptions of our innate workings, and given the nature of the world, we are forever grappling with bewildering complexity whose make-up is continuously changing and far bigger than what we can apparently ever hope to truly comprehend.

We give daily battle

Yet bravely we give daily battle, trying to remain on top of things and adjust our thinking and responses, but it is difficult, given our very real limitations.

Greenspan, for one, despairs that our human condition will ever outgrow its inclination towards hope and fear, such extremities in emotion never becoming fully controlled and that juggernaut rides will remain a reality in human life.

Similarly, according to Mr Greenspan, at the technology frontier our innate human cleverness allows us to innovate at maximum 2.5 percent annual growth in average labour productivity over the long term, but nothing more, limited by our genetic inheritance.

Of course, as we tinker with our genetic endowment, we may succeed in changing a few things. Thus, in time, super beings could evolve with technically improved wiring, allowing greater cleverness and potential for faster gains in knowledge and technical innovation. Similarly, we may succeed in improving our emotional abilities, currently limited by our genetic endowment.

But this is in the future, not today, and certainly not for the already living, who have a way of feeling stupid at times (genetically confirmed) and sometimes very emotional indeed about events (similarly showing up some very innate capabilities).

And thus we get carried away with events. Up till mid-2008, there was still the afterglow of a decade of success, and a generation of Great Moderation and global integration fuelling an unprecedented prosperity.

And then we got entertained in a matter of months with a blowing up of the global financial system, a loss of financial confidence and paper values, a terrible misfiring of the global economy and the overwhelming fear of going back to the Dark Ages, undoing all modern progress (when hyping, one shouldn’t hold back but go all the way and ask forgiveness afterwards).

Yet there is one more human characteristic to take into account. There is our resilience to take corrective action even when threatened by overwhelming odds. Such survival instinct won’t help you if the danger is truly great. But we can at least give it our best shot.

The past year gives that sense on a global scale. A terrible danger had come into being, but those in authority responded, not always with first options, but certainly with determination to find a way out, reminding of the Poseidon Adventure, How The West was Won, the Return from Egypt, Exodus, the flight from Moscow (twice) and Saigon (once), and other such daring-do tales.

Becalming of the wildest emotions

And in the process, after the great heat of the moment, we can notice a becalming of the wildest emotions, as fear seems to be subsiding and hope returns.

Or at least where a greater balance between these extreme emotions seems to become restored as the worst hasn’t happened and repair and recovery from disaster are apparently finally in hand.

And thus a new cycle of human emotional responses is being set in motion, probably taking us to new heights of human performance endurance.

Until we start to lose our way once again, success and hubris reinforcing each other, taking our assessment of reality off the straight and narrow, causing mistakes to be made, and ultimately terrible retribution and forced adjustment to be deluged on us once more.

Nothing new in any of that, but it remains disturbing to think we can’t remain fully in control of all our mental faculties all the time. They better hurry up with those genetic modifications, and the Mark 11 model human being.

But by then we may no longer be quite Human.

Cees Bruggemans is chief economist of First National Bank.


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