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Hope-mongering by the financial system

Credibility Crunch engendered by Hope-mongering: "Credit crunch" focus as symptom of a dangerous mindset (Part #12)

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The succession of increasingly dramatic crises in the financial markets, initially triggered by defaults on subprime mortgage loans in 2007, offers a glaring example of hope-mongering. As has been repeatedly declared, the financial system is based on confidence and trust -- notably in the guarantees traditionally offered regarding any "promise to pay", and the backing asserted to be associated with such guarantees. The focus at the time of writing is on "rebuilding confidence" in the financial system.

It is however useful to observe where hope-mongering took place -- and how it contributed to the breakdown in confidence in the financial system as it had been known to that point:

  • marketing of subprime mortgages: it has been made clear that the process whereby cheap mortgages were offered to people in the USA, desperate for housing but unable to afford it, can be usefully described as hope-mongering. Purchasers were reassured by sellers, justifying their hopes, that they could safely engage in such transactions. It is now recognized that sellers were irresponsible (possibly criminally so) in failing to make purchasers more fully aware of the process in which they were engaging, or to be sufficiently diligent in refusing more risky mortgage loans -- as is the practice in many countries. This is a form of mis-selling.

  • development of the derivatives market: financial derivatives have been an exercise in financial creativity of the highest order, reliant for their profitability on mathematical understanding accessible only to the few. The profitability was however obvious to those exposed to its potential, encouraging those responsible to enable engagement in that market to the fullest. The complicity between those with the understanding, together with fund managers, shareholders, financial journalists and academic commentators, was such as to develop and sustain a bubble of confidence in this process over an extended period. Who was hope-mongering to whom? Or is such a bubble best to be understood as a process of mutual hope-mongering -- necessarily rejecting any precautionary considerations?

  • risk management: those directly engaged in investment of their own funds, or those of others, are necessarily intimately involved in the process of risk management in pursuit of maximum profitability. Whether in convincing themselves, or their clients, of the acceptability of a risk, there is necessarily a degree of hope-mongering. As best recognized when gambling, there is a process of self-persuasion whereby one is convinced -- possibly against the odds -- that the hoped-for profit will result from the transaction. Financial high-flyers -- as with free solo climbers who forego ropes, harnesses and other protective gear while ascending (relying only on physical strength, climbing ability, and psychological fortitude to avoid a fatal fall) -- are those capable of psyching themselves into confidence in navigating risks others would tend to avoid. Such self-directed hope-mongering is to be admired -- provided it does not exploit the resources of others, as so clearly demonstrated by Nick Leeson, whose unsupervised speculative trading in 1992 caused the collapse of Barings Bank, the United Kingdom's oldest investment bank.

  • "talking it up": with respect to currencies, other financial instruments, or investment possibilities, there is a well-recognized process of "talking it up" (Talking Up the Dollar, 12 June 2008; Bush Talks Up Dollar as He Heads to Europe, 10 June 2008; IMF Chief Talking Up the Dollar, 8 October 2007; Talking Up the Dollar, 20 July 2001). This process was in evidence during the financial crisis of September 2008 when spokespersons of financial institutions in immediate danger of collapse endeavoured to reassure investors that their investments were safe and the institution was sound -- specifically to discourage withdrawals. The beginning of that historic week even saw US presidential candidate John McCain stating, in a much publicized phrase, that the economy was "fundamentally sound" [more]. The invitation to have confidence in a vulnerable institution, especially by those informed of its degree of vulnerability, can be most appropriately described as hope-mongering. It is especially problematic when it makes light of the risk to the life savings of the most vulnerable people.

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