The Delusion of Control

The National Association for Business Economics released a survey this week reporting that “more than 90 percent of economists predict the recession will end this year.” On that forecast, I would not bet any money that I could not afford to lose.

Their cautious but optimistic forecast is in line with those of government officials, such as Ben Bernanke, and it reflects two biases. First is the well-known herding mechanism that drives forecasters. If you issue a forecast that is in line with the forecasts of others but the consensus is wrong, who can blame you? There is safety in numbers. All who are wrong exclaim, “We didn’t anticipate….” The second bias comes from the belief that surely what Obama, Bernanke, and Geithner are doing will have some effect.

In her book A Mind of Its Own, Cordelia Fine describes a classic social psychology experiment about the delusion of control:

Take, for example, a task in which volunteers are asked to try and get a light to come on by pressing a button. Volunteers are told that the button might control the light; in fact, the light comes on and off randomly and its illumination is entirely unrelated to what the volunteer does with the button. Yet although the volunteers have actually no control over the light, their perception is very different. They experience the illusion of control, as it is known, and claim to have an influence over the light. As subjects for further vanity, people rate their personal control more highly if the light happens to come on more often. In other words, we are even more susceptible to the self flattering impression that we are responsible for how things have turned out when they turn out well.

Let’s apply this to our seemingly bottomless—for now—faith in the capacity of Obama, Geithner, and Bernanke to control the economy. Obama, Geithner, and Bernanke tell the public that there are light switches in their offices and that they know how to turn them on. The three of them sit by their switches, frantically trying to get the lights to come on. And when the lights happen to come on—in other words, when there is occasional good news about the economy—the public dutifully applauds and says on cue, “Aren’t we fortunate that in our time of troubles we have found such talented individuals who know how to turn on the lights.”

The only problem is that—to the extent they have any control at all—their light switches are not connected to a healthy economy but rather to mechanisms that causes further harm to the economy.

Notice the title of my essay is “The Delusion of Control” and not the more genteel “The Illusion of Control.” David Gershaw explains the difference between illusion and delusion.

An illusion is a perceptual disturbance, while a delusion is a belief disturbance….a delusion is a deeply held false belief that is maintained—even when other information contradicts the belief. The contradictory information is either ignored completely or discounted in some way.

In other words, some are under delusions about how the economy works. They believe—against all evidence—that the cure for too much debt is even more debt and that the cure for a failed business decision is a bailout. They are not suffering from illusions; they are deluded.

Back to the forecast by the business economists. An astute observer, Bill Bonner, recently wrote:

The private sector is not going to begin a new growth period until they’ve paid off, worked out, defaulted on, or shirked a lot of their present debt load. We’ve estimated that they need to get rid of about $20 trillion worth. And that’s going to take time. And a lot of painful decisions by a lot of people. Bad business, investment and spending decisions need to be recognized…and fixed. Debt needs to be reduced.

Do business economists really think that this process—in the face of all the interferences by government—will be completed this year?

Straight Talk About Bear Stearns

Last week the Fed brokered a deal to sell failing investment bank Bear Stearns to JPMorgan Chase. At the same time, the Fed announced that it would be willing to lend directly to Wall Street brokers.

If you are a casual observer of financial markets, you will be forgiven for believing that the Fed’s move last week was a good one. After all, the stock market—which had been in danger of further losses—has, for the time being, been stabilized; many analysts have lionized Bernanke for making a sound and bold move.

This week Business Week put Bernanke on its cover and added to its headline “Bernanke reinvents central bank to avoid catastrophe.” If only that could be true. What Bernanke has done is to postpone the day of reckoning; and by so doing, he has set the stage for an even bigger crisis.

Last week, legendary investor Jim Rogers pulled no punches when he critiqued the Fed’s move. It is well worth 12 minutes of your time to listen to this very colorful interview.

No, Rogers is not exaggerating—the Fed has indeed bought hundreds of billions of dollars of junk assets. In the JPMorgan Chase case, the Fed has guaranteed $29 billion dollars of losses on the junk mortgage backed securities that Bear Stearns held.

As Rogers points out, none of this is in the Fed’s mandate. As the Fed bails out those who took bad risks, it is destroying the dollar; and it is setting the stage for a true collapse of the economy.

Indeed, it is also true what Rogers said about Wall Street bonuses. In 2007, Bear Stearns’ bonus pool was $2.06 billion dollars. Under bankruptcy laws, had the Fed allowed Bear Stearns to go bankrupt, all of that money would have had to have been repaid by the employees who took those bonuses home.

None of the Fed’s actions are legal, as John Hussman, president of Hussman Investment Trust, points out:

The Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns’ mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.”

What is a “non-recourse loan”? Put simply, if the homeowners underlying that weak tranche of debt go into foreclosure, they will lose their homes, and the public will lose as well. But J.P. Morgan will not lose, nor will Bear Stearns’ bondholders. This will be an outrageous outcome, if it is allowed to stand.

Paul La Monica, writing yesterday at CNN Money, observed that already other banks are lining up for a Fed handout:

Now other banks appear to be angling for a spot at the Fed trough. In an interview with the San Francisco Business Times last week, Wells Fargo Chief Executive John Stumpf said his bank “would not be averse to a Fed-assisted transaction” and added that “fixer-uppers don’t bother us.”

Well, who wouldn’t be interested in a fixer-upper if you knew that the Fed would be there to help you deal with all those losses? Heck, I’d buy the house from that Tom Hanks movie “The Money Pit” if a friendly central banker was willing to reimburse me for all the renovation costs.

Not surprising, others are arguing that if the Fed can bailout Wall Street, why can’t the government do more for the homeowner. Proposals are gaining traction in Congress that would forgive the amount that a homeowner is underwater. Congressman Barney Frank wrote this month in the Washington Post:

We propose to tell those who either originated or purchased mortgages that are now extremely unlikely to be repaid that they should write down their existing obligations to a level that represents current market value. After — and only after — the loss is taken, the government would facilitate refinancing mortgages for homeowners who could meet repayment obligations at the new, written-down level.

It is easy to forecast how all of this is going to unfold. More and more extreme proposals will be floated and implemented. When the economy collapses in exhaustion, those who learned nothing will tell us “if only we had done more.” This will set the stage for even more dangerous and draconian measures.

All of this economic madness is, and will be, fueled by the false beliefs that we hold collectively as a society. These beliefs include the ideas that the Fed can prevent economic cycles and that government should manage prices. Until these beliefs are finally examined and seen to be false, the economic carnage that these beliefs will cause is likely to be enormous.

The Real “Global Emergency”

Every society, every human being, every organization has unquestioned assumptions. These unquestioned assumptions, called paradigms, create problems precisely because they are unquestioned. Indeed, frequently these assumptions are unquestionable. Those who question the orthodoxy are not dealt with kindly.

One of the current paradigms of contemporary society is that global warming is caused by human beings increasing the amount of carbon dioxide in the atmosphere through the process of burning fossil fuels.

On 3/21/07 former vice president Al Gore spoke before Congress and said that the world faces “a true planetary emergency.” The emergency required “a ban on any new coal-burning power plants.”

What if cycles in temperatures were a natural part of earth’s history? What if the variations in the activity of the Sun were the primary driver in climatic changes? What if causation was reversed and global warming caused increases in carbon dioxide.

I am not a climatologist, yet when I watch the British documentary The Great Global Warming Swindle I am struck by the hubris of scientists and politicians who claim it is a proven fact that human beings have caused global warming. Full of hubris they advocate dangerous policies and show little tolerance for dialogue on the issue.

The great English philosopher Karl Popper wrote: “There are no ultimate sources of knowledge. Every source, every suggestion, is welcome; and every source, every suggestion, is open to critical examination.” It is indisputable that when a society forgets this they are heading for trouble.

 

I would never defend poisoning our atmosphere, but yet I know that many of those who are most adamant that global warming is caused by human beings are also most adamant about advocating controls that will visibly hurt the poor third world countries of the world.

 

As this video argues using less fossil fuels has the “unintended consequence of stifling development in the third world, and prolonging endemic poverty and disease.” Al Gore has been in the forefront of the movement to use less fossil fuel. His book Earth in the Balance and movie An Inconvenient Truth has been hugely popular.

 

Yet good intentions are not enough. Al Gore’s home, “located in the posh Belle Meade area of Nashville, consumes more electricity every month than the average American household uses in an entire year, according to the Nashville Electric Service (NES)”. See http://www.tennesseepolicy.org/main/article.php?article_id=367

Seeing your children grow-up malnourished, uneducated and without prospects for a better life is the real every day emergency faced by billions on this planet. This poverty breeds wars. And while the causes of this poverty is far more than the lack of cheap energy, controls that increase the price of energy will prevent solutions from being reached.

Some may imagine living on a bucolic farm in Vermont as an ideal existence. Admittedly there are many benefits of doing so. However, there is nothing romantic about living on subsistence farm in the third world without adequate food, shelter, energy or even a legal system that protects your property rights. This is something particularly vicious about those who have so much condemning others to lifelong poverty.

1/3 of the world’s population does not have electricity. Their lives are frequently short and filled with hardship. Some will argue let “them” use solar energy. For the third world solar energy is not a viable alternative. The documentary asks: If the third world cannot even afford conventional electricity how can they afford the more expensive solar alternative?

Here is the ultimate irony. Those who scream the loudest about man-made global warming inevitably embrace more government planning and control. Such planning and controls gives us heavily subsidized government fuels such as ethanol, which in turn results in a whole set of intended and intended consequences. Not the least of these consequences is the taxpayer subsidizing large corporations such as Archer Daniels Midland. Read this Cato Institute study for an eye-opening report on what ADM gains in subsidies.

There is ultimately a finite amount of capital available to develop new energy sources. Those who would plan and control make less capital available to entrepreneurs who will one day develop viable solar energy systems or other alternative energy sources.

Controls postpone the day that mankind no longer burns fossil fuels and in the meantime helps to prolong misery for many.

“If You Think You Can Control Something”

My daughter, soon to be twelve, takes piano classes at the Peabody Preparatory. One of the advantages of the program is the children are giving several opportunities each year to perform in recital. I believe that these performances give the children a life long gift of being comfortable in front of an audience.

Recently my daughter was nominated by her teacher to play in one of the more prestigious recitals of the year. In addition the following week she would play in another performance that she was selected for. This was all outside of her comfort zone and she was feeling a bit unsure of herself.

Feeling unsure manifested itself with a lot of opinions of what she was hoping she would or would not have to play and opinions that maybe she should only have to play in one recital. It was time for a chat.

I asked her how she felt when her mental activity was focused on what she did not want to do. She responded, very small and constricted. I asked how she played when she felt that way. The answer was equally clear to her.

Then I inquired how she felt and played when she was focused on what she wanted to be. The answer was as clear.

I explained that when she was feeling constricted by her mental activity she was like a thimbleful of water from the ocean. She was small and separated from her Source. In reality she is part of a vast ocean of what Dr. Thomas Hora calls Love-Intelligence. When she decides not to separate from that ocean, Love-Intelligence is able to play through her. When she allows it, only then is she being her true Self.

Lessons are most valuable when they come from within. In her own words here is what she learned: “If you think you can control something, things are harder. If you trust in something, things are easier. Trust in what you can be, rather than what you don’t want to be.”