Financial mania: Why bankers and politicians failed to heed warnings of the credit crisis

Western economies displayed the same kind of manic behaviour as psychologically disturbed individuals in the run up to the 2008 credit crisis -- and it could happen again, according to a new study.

Bankers, economists and politicians shared a "manic culture" of denial, omnipotence and triumphalism as they threw caution to the wind, says Professor Mark Stein, the award-winning academic from the University of Leicester School of Management.

Observing - but not heeding - the from the collapse of the Japanese economy in 1991 and the 1998 crisis in south-east Asia, the financial world in the West went into an over-drive of denial, escalating its risky and dangerous lending and insurance practices in a manic response, he says.

Professor Stein, who has today (June 7) been awarded the iLab prize for innovative scholarship, identifies and describes this manic behaviour in the 20-year run up to the in a paper published in the Sage journal Organization.

The causes of the banking collapse that plunged the UK and many other countries into recession have been well documented but an important question remains: Why did economists, financiers and politicians fail to anticipate it?

Professor Stein argues that the financial world was suffering from collective mania in the two decades running up to the events. "Unless the manic nature of the response in the run up to 2008 is recognised, the same economic disaster could happen again," he warns.

He defines the manic culture in terms of the four characteristics of denial, omnipotence, triumphalism and over-activity. "A series of major ruptures in capitalist economies were observed and noted by those in positions of economic and in Western societies. These ruptures caused considerable anxiety among these leaders, but rather than heeding the lessons, they responded by manic, omnipotent and triumphant attempts to prove the superiority of their economies."

The massive increase in credit derivative deals, industrializing credit default swaps and the removal of regulatory safety checks, such as the repeal in the United States of the landmark Glass-Steagall banking controls were a manic response to the financial crises within capitalism," he says.

Professor Stein's award-winning research paper - A culture of mania: a psychoanalytic view of the incubation of the 2008 credit crisis – says this behaviour was also strengthened by "triumphant" feelings in the West over the collapse of communism.

"Witnessing the collapse of communism, those in power in the West developed the deluded idea that capitalist economies would do best if they eschew any resemblance to those communist economies, thereby justifying unfettered financial liberalization and the destruction of the regulatory apparatuses of capitalism. The consequences of this manic response have been catastrophic, with the on-going eurozone crisis being - in many ways - a result of this," he says.

"Whether one examines the actions of banks and hedge funds, or the limitations of ratings agencies, auditors, regulators and governments, a more worrying and deeper question emerges concerning why so many parties, more or less simultaneously, were implicated in such unprecedented and extreme risk-taking."

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Jun 07, 2012
The next question that we need to ask is why we keep doing it? Austerity sucks but you can't spend your way out of a financial hole! Also, some regulation is required to ensure that we don't do this again. No regulation is a silly idea and over-regulation is an even worse (sillier, even!) idea.

Jun 07, 2012
It is quite simple. Politicians and bankers were not risking THEIR own personal wealth. They were risking other people's money and, because all banks are state controlled with fiat currency, many banks were insured by the govt, aka taxpayers.
But of course the socialists won't acknowledge their failure and demand MORE govt control, more govt inflation, spite of several examples of govts that that have been responsible and whose economies are expanding.

Jun 07, 2012
I told my banker minions to create an artificial crisis. Humans would perish without their pesty money. Weaklings deserve to die.

Jun 07, 2012
I'm saying here all the time, the ignorance of cold fusion is the reason of oil wars, rise of the oil prices and the subsequent financial crisis, but most of readers are ignoring me here as well. Are they maniacs?

Jun 07, 2012
Just because experts are specialized to narrow area of their private interest, they're not qualified in judging of their opinions in wider context - on the contrary, they tend to occupy their stances rather blindly - the more, the more they feel being an experts in given area. In this context the reading of articles The era of expert failure by Arnold Kling, Why experts are usually wrong by David H. Freeman and Why the experts missed the crash by Phill Tetlock may be useful not only for financial experts.

Jun 07, 2012
What's silly is that the Neo-liberal/Libertarian/Randites insist that we can't spend our way out of this crisis while also insisting that cutting taxes for the wealthy/corporations will create jobs.

There is no operative difference between the two, except for the fact that this crisis was the result of a decades-long pursuit of the big payoff --the harvesting of all that accrued wealth made possible by the regulatory structure put in place in the New Deal.

"Ironically", all of that transferred wealth, which was supposed to have fueled a windfall of new job creation by those with the wealth led to nothing of the sort --which, plainly-- puts paid to the Big Lie of trickledown economics. If deregulation worked as its proponents claimed the economy, and the wealth of average Americans, and indeed, of everyday people worldwide, would be on a steady uptick --which is manifestly divergent from the reality.

Nothing less than massive theft. And without remedy --at least so far.

Jun 07, 2012
There is no operative difference between the two,

Stealing money from taxpayers or printing money for the govt to spend is the same at cutting the overhead costs for businesses to create wealth?
The difference which socialists can't, or won't, understand is one is the first destroys wealth and the the latter enables the creation of wealth, and weakens the power of the state.

Jun 07, 2012
There is no operative difference between the two,

Stealing money from taxpayers or printing money for the govt to spend is the same at cutting the overhead costs for businesses to create wealth?
The difference which socialists can't, or won't, understand is one is the first destroys wealth and the the latter enables the creation of wealth, and weakens the power of the state.

A rationalisation worthy of you powers of self delusion, and your devotion to that worn-out neoliberal/corporatist/randite ideology you so pathologically cling to.

Government spending to create jobs does just that.

But a vertical transfer of wealth remains only a vertical transfer of wealth.
A vertical tranfer of wealth gives the wealthy all the tools necessary to do the same thing as government spending for job creation --and by their own(and hence your) argument. Thus, no operational difference.

Where are these jobs?

Jun 07, 2012
Government spending to create jobs does just that.

BHO has added $5 trillion to the debt and unemployment has gone up.

How many is Solyndra employing now? Or Fisker, in the USA?

Where are these jobs?

How much will Obamacare cost businesses? How many received waivers? How many jobs were lost by cancelling Keystone and the EPA changing the rules on coal mining in WV or oil drilling in the Gulf of Mexico?
Unknown, capricious govt regulations create uncertainty keeping private investment someplace safe, until the govt stops attacking business.

Jun 07, 2012
"President Obama would do us all a big favor if he'd ask himself this: "Would I start or expand a business without knowing what regulations or taxes government will impose next year?""
"Every week, the feds add another thousand pages of rules and proposals for rules. Local governments add their own. My mayor, in New York City, even proposes micromanaging the size of the drinks restaurants may sell.

On top of the existing mountain of red tape, the Obama administration has piled on more, with more to come. Obamacare was less a specific prescription than a license for the Department of Health and Human Services to write new rules, lots of which are yet to be written. No one knows how the bureaucrats will micromanage health insurance."
"Then there's Dodd-Frank, the 2,300-page revamp of finance industry regulation. Again, the bill left the rule-writing to regulatory agencies. Who knows what they will come up with?"

Jun 08, 2012
ironically, the implication of this principle is to portray russia as a leading (albeit unwitting) contributor to american economic crisis fostering in american society a false sense of overconfidence and perfection. I suspect some communist philosopher somewhere may have anticipated this.

If I were to guess the leading factors in contributing to the next wave of financial mania I would have to put the capture and death of Osama Bin Laden as the closest psychological equivalent to past precursors. I believe he was a philosopher and also that he declared he intended to cause the economic failure of america for it's arrogance in forcing american financial and world trade customs over traditional muslim values. Perhaps by his capture he has achieved this goal?

If we look for the next .

Jun 08, 2012
This comment has been removed by a moderator.

Jun 08, 2012
which apparently started during Bush government.

It started in 1997, as the stock prices were tanking, during the Clinton administration.
In order for the govt to get banks to fund risky mortgages to support the fiction banks were 'racial profiling' they had to grantee them with Freddie Mac and Fannie Mae.
Banks like Wachovia bundled mortgages and sold them to any and all to satisfy their 'obligations' to the Community Reinvestment Act. After all, they were guaranteed by Uncle Sam.

Jun 08, 2012
groups like those funded by the Koch bros

What is your take on the socialists supported by Soros?

Jun 08, 2012
"median income, after inflation, is lower than it was the day I left office," former President Bill Clinton said on CNN's "The Situation Room" on Thursday afternoon. "

Obama's socialist policies are working!

Jun 08, 2012
"Not so long ago, Sweden could claim world leadership in unmitigated Keynesian economics, with a 90 percent marginal tax rate and a welfare state second to none.

Now Swedes look at the conflict between the U.S. and German examples over whether more spending or more austerity is the key to financial salvation, and for them the choice is easy: Germany was right. Northern Europe harbors no sympathy for the spendthrifts of Southern Europe. "
"Americans still think of Sweden as a tightly regulated social-welfare state, but in the last two decades the country has been reformed. Public spending has fallen by no less than one-fifth of gross domestic product, taxes have dropped and markets have opened up. "
"From 1970 until 1989, taxes rose exorbitantly, killing private initiative, while entitlements became excessive. Laws were often altered and became unpredictable. As a consequence, Sweden endured two decades of low growth."

Jun 09, 2012
overnment control over "natural" monopolies, held in trust for the public, could, possibly, be feasible,

How well has this been working out?
And, if its not OK for the Koch's to promote free markets do you find it acceptable for socialists like Soros to use his billions to promote socialism? Why would billionaires promote socialism?

Jun 09, 2012
"Government run public utilities are known to provide better value than their private counterparts."
Says who, the government?
All 50 states grant monopolies to utilities.
When some utlities have been 'deregulated' how have their former regulated monopolies performed? Cable TV used to have a govt granted monopoly. Now many have choices, satellite and fiber. ATT used to be the ONLY telephone company. Now there are many non-govt competitors for both service and hardware.
If govt monopolies were so great, why didn't they compete with satellite TV or cell phones?

Jun 09, 2012
""We do not believe our system is fragile," TVA spokeswoman Barbara Martocci said.

David Orr, an environmentalist and Pentagon climate change consultant who spoke in Chattanooga just after the tornadoes, said terrorism and climate change are dictating new needs for energy policy.

"Anything that is as centralized as our power grid, which takes power from one big place to many small ones, is vulnerable," he said. "We have to change the model."

Read more: - TVA says power grid not fragile despite storms
People in northern AL lost GOVT power for over 5 days.

Jun 09, 2012
oros is a follower of Karl Popper who was strongly opposed to collectivism

So why does Soros support collectivists?

Jun 09, 2012
whenever it's unfeasible for competition to enter a market

Who decides it is unfeasible?

If Soros is such a great liberatarain he would be funding the
Future of Freedom Foundation,,
"No need to go on characterizing Soros's Grand Theory. The declaration that capitalism must be hobbled has been made ten thousand times since socialist thinking became the vogue a century ago. As usual, behind it is a deep distrust of human freedom combined with an unwarranted faith in government control."
"But when they decide to cozy up to politicians, pose as philosopher kings, and urge government planning on the world, they are capable of doing enormous evil. Recall that Friedrich Engels was a wealthy businessman too. "

Jun 09, 2012
distractions such as socialism/capitalism

This is equivalent to arguing over tyranny and liberty.
Living free and living in chains is just a 'distraction'?

Jun 09, 2012
"Spains financial problems are not due to Greek-style government over-spending. The countrys banks got caught up in the collapse of a real estate bubble.

Spains banks, particularly its savings banks or cajas, have enormous amounts of bad loans. And as the second recession in three years hits Spain, the number of bad loans is expected to surge. Spains unemployment has risen to nearly 25 percent, making it increasingly difficult for many Spaniards to pay their mortgages."

Jun 10, 2012
while those thirsty for power will find ways to attain it,

Yes, the 'progressive'/socialist have been demonstrating this for centuries.
It is not that hard to determine if something is a "natural" monopoly.

Then define it. It it were 'natural' there would be no need for any govt to protect it.
It is not that hard to determine if something is a "natural" monopoly.

everyone wants to protect their own free will

No, people want to protect their property.
"Each of us has a natural rightfrom Godto defend his
person, his liberty, and his property. These are the three basic
requirements of life, and the preservation of any one of them is
completely dependent upon the preservation of the other two."
The Law, Bastiat.

Jun 10, 2012
After that comes the more contentious issue of positive rights but there are ways of implementing them without infringing on anyone's free will

"As long as it is admitted that the law may be diverted from
its true purposethat it may violate property instead of protecting
itthen everyone will want to participate in making the law,
either to protect himself against plunder or to use it for plunder."
"Nor is it sufficient that the law should guarantee
to every citizen the free and inoffensive use of his faculties for
physical, intellectual, and moral self-improvement. Instead, it is
demanded that the law should directly extend welfare, education,
and morality throughout the nation.
This is the seductive lure of socialism. And I repeat again:
These two uses of the law are in direct contradiction to each
other." The Law.

Jun 10, 2012
Capitalism at its best:

Jun 10, 2012
credit,in the absence of coercion,

Credit is private property. Wealth that someone created and lent to someone else with a promise to pay back.
People have private rooms and common areas,instead of all bedrooms,in their residences for a reason,it facilitates freedom and exchange.

But the 'common area' is still private property and subject to the rules of the owner.
Shopping malls are private property and if patrons behave appropriately, they can shop. If not, they are escorted out.
.Look at how well most of Africa has done without sane Governance.

Somalia has in many case been better off than their neighbors with socialist tyrannies. It's documented.
Government of some form cannot be divorced from a free society, it is integral to it.

Not of 'some form', a specific form, limited to protecting private property.

Jun 11, 2012
Government has wealth

Only the wealth it plundered, took by force, from those who created it.
The most important part is the absence of coercion.

Then the govt can have no wealth as the govt REQUIRES coercion to acquire wealth. (But you asserted the govt has wealth?)

The underlying principle and benefits of "common areas" holds whether it is public or private.

No, it does not. If all the forests in the USA were held has private property, to you believe they would be better managed than the 'common' property is today? The same applies to oceans, range land, any property that is either not owned.
How do public housing units compare with privately owned apartments or houses?

Jun 11, 2012
Forests managed themselves pretty well for millions of years without the name "private" attached to them

Then the govt stepped in and mismanaged the forests by putting out the fires nature started and the forests needed to thrive.
Private forests want to harvest the wood so manage their forests to minimize fire damage.
authority of Government concerning property or wealth is also illegitimate.

Not if that authority is limited and derived directly from the property owners.
Individuals have the natural right to defend their property, their lives and such individuals can work together for their mutual defense.
"...their just powers from the consent of the governed..." ring any bells?

Jun 11, 2012
private property necessarily gains its legitimicy and originally started with Government it is

"It is not because men have made laws, that personality,
liberty, and property exist. On the contrary, it is
because personality, liberty, and property exist beforehand,
that men make laws. What, then, is law? As I have
said elsewhere, it is the collective organization of the individual
right to lawful defense."
"If every man has the right of defending, even by force,
his person, his liberty, and his property, a number of men
have the right to combine together to extend, to organize
a common force to provide regularly for this defense.
Collective right, then, has its principle, its reason for
existing, its lawfulness, in individual right;"
The Law, Bastiat

Jun 11, 2012
That's where Government authority is derived from.

That is NOT what you said.
You asserted govt created property:
"Since private property necessarily gains its legitimicy and originally started with Government it is"

Jun 11, 2012
Just because I did not explicitly point out that that authority is 1st delegated to government from individuals does not mean I do not appreciate that fact.

I said the ONLY wealth a govt has is what it has plundered.

Jun 11, 2012
Just because I did not explicitly point out that that authority is 1st delegated to government from individuals does not mean I do not appreciate that fact.

Again, regardless of authority, the only wealth any govt has is what it has plundered, not created.

Jun 12, 2012
legitimize property,

Property is legitimate without govt.
Most govts were institutionalized to plunder property.
Oh at first they claimed they were going to protect your property. Pay us a few bushels of grain every year and we will keep raiders away. Don't pay and we will burn your fields. So the first govts were essentially organized violent crime.
The US attempted to change this by creating a system that declared govt must be limited derive its power from the governed. It wasn't a new concept, but it was one of the first times it was attempted.
As Mises noted, "All ownership derives from occupation and violence." "Economic action demands stable conditions. " "Thus it is no accident that it is precisely in the defence of property that Law reveals most clearly its character of peacemaker."
Not plunderer.

Jun 13, 2012
Flat taxes are a bad idea
It's easy to say, bit why they're a bad idea? IMO progressive tax brings it's own problems and the rich people tend to evade it. As the result, the government gets less money instead of more.

Jun 13, 2012
Fresh article at The New Yorker: Research Shows That the Smarter People Are, the More Susceptible They Are to Cognitive Bias. Nothing very new for me in this extent.

Jun 13, 2012
it's the misaligned incentives,environment and ambiguous goals and limits of current governments.

What limits?
The problem with most govts today is there are NO limits and they must run out of other people's money.

Jun 13, 2012
Many of the ideas that the average libertarian proposes would only serve to exacerbate that state of affairs

How would following the letter and intent of the US Constitution increase the level of socialism?

Jun 14, 2012
How would following the letter and intent of the US Constitution increase the level of socialism?

The constitution is being followed right now according to the courts. Do your views somehow overrule that?

The US Constitution was written by what were then called liberals.

Those who call themselves 'liberal' today would not have written that document.

Jun 15, 2012
Have you ever read liberal philosophy?

You mean John Locke?
"Starting from an initial state of nature with no government, police or private property, we humans could discover by careful reasoning that there are natural laws which suggest that we have natural rights to our own persons and to our own labor. Eventually we could discover that we should create a social contract with others, and out of this contract emerges our political obligations and the institution of private property. This is how reasoning places limits on the proper use of power by government authorities."

Jun 15, 2012
"Liberalism is a doctrine directed entirely towards the conduct of men in this world. In the last analysis, it has nothing else in view than the advancement of their outward, material welfare and does not concern itself directly with their inner, spiritual and metaphysical needs. It does not promise men happiness and contentment, but only the most abundant possible satisfaction of all those desires that can be satisfied by the things of the outer world."

Jun 16, 2012
The idea of liberty is to allow people to be material, spiritual, neither or both as they so please as long as they do not infringe on another's rights.

And those who call themselves 'liberal' or 'progressive' today are opposed to this idea of liberty.

Jun 16, 2012
I think that saying they or any group composed of average individuals is opposed to liberty is wrong.

Now you sound like a 'progressive' asserting 'average' individuals are too stupid to know why they vote.
So why to 'average' individuals agree with class warfare tactics executed by 'liberals' that attack liberty?
I respect the 'average' individual's intent to attack liberty and offer them no excuse.

Jun 17, 2012
large group of individuals who want the ends of less freedom of choice

Most of France. They just voted for less freedom.
Will Greece vote for more govt?
promoting an ideology which could easily lead to less freedom for many,

How? How will a govt whose ONLY purpose it to protect every individual's life, liberty and property lead to 'less freedom for many'?

Jun 17, 2012
it can't,

Of course it can, and does, every day.

Ever hear of something called an easement?

Jun 17, 2012
hypothetical situation

How about a real situation where people buy land around a farm that spreads its manure on the fields to raise organic crops and the new neighbors complain about the smell and the government forces the farmer out of business?

Jun 17, 2012
Now it is becoming clear the current socialist leader, Obama, is failing, the true believers blame the leader not the policies.

Jun 17, 2012
You are making an argument for government,

Yes, LIMITED govt as described and motivated in the US Declaration of Independent which reiterated the individual's rights to life, liberty and property are inherent and unalienable.
Bastiat also described the characteristics of a govt limited to protecting private property and the rest that plundered private property.
constrain freedom of choice instead of maximizing it.

The only legitimate use of govt IS to use its monopoly on violence to protect the individual's rights to live, liberty and property. This DOES maximize freedom of choice.

Jun 17, 2012
A group that buys the property surrounding a city can create virtual slavery, transportation of necessities in for everything they produce while letting no one out,

Then this group is violating the individual's rights to life, liberty and property and the city is justified in using violence to protect their rights.
The same holds true for your other ridiculous example.

Jun 17, 2012
Now you are mixing libertarian ideology with the constitution? They are not the same.

Sure they are. The US Constitution was written by classical liberals/libertarians.
Govt is the monopoly on violence. How should that violence be used? Should it be used to protect every individual's right to life, liberty and property? Should it used to protect the rights of only a few by plundering the rest?
Bastiat compares the use of this violence quite well. The few plunder the many, the many plunder the few or no one is plundered. Which do you prefer?
What is a positive right to travel? The govt must plunder the wealth of your fellow citizens to pay for your travel?
What if a road was privately owned, as most were hundreds of years ago? They were called turnpikes and many still exist and thrive. They make no money if no one travels on them. But then govt owned roads and bridges raise prices in order to make travel less free.

Jun 17, 2012
Government forcing people to supply easements because they own the property surrounding yours is acceptable according to you,

That is not what I said.
What I said is the individual's right to life and property is being violated by a violent siege. Such an individual has the right to use violence to defend HIS right to life and property.
The instigator then must take into account the his cost for the attempt as must the victim. When offered no choice the individual under siege must return the violent action taken against him to defend his rights.
This is essentially the situation in the relationship among the nation-states. There is no govt, only violence, the threat of violence and the costs of violence.
In your example, if the property owner spends all that money and risks violent retaliation for the siege, they must have a serious reason to engage in the siege.

Jun 17, 2012
Most nation-states limit your 'right to travel'.
Some require visas to enter AND/OR to leave.
Some are easy to obtain depending upon your intentions.
I personally support changing US immigration laws to allow anyone into the USA who is healthy and has not criminal record. There would be no federal welfare available and they would have the opportunity to work for whomever would hire them and/or start their own business.
If this were implemented I suspect many other nation-states would begin to lose the best and brightest and would either restrict them from leaving OR change their laws to encourage them to stay.
The US is designed as a collection of states. We see many voting with their feet. Fleeing high tax, high cost states like IL, MI, CA and NY to states that encourage prosperity and liberty.
Some states and nation-states want to limit such travel.

Jun 18, 2012
implementing a government

Government IS violence. It is a monopoly on violence.
The question is how is that violence limited.
Usually it is restrained by defined laws, but when the president of the US refuses to enforce and follow the laws he has sworn to uphold, then the rule of law if over and the arbitrary rule of kings begin. BTW, this is no different than socialism. Rule of kings, rule of the mob (majority) is the the same.

Jun 18, 2012
"Government is not reason. It is not eloquence, George Washington reportedly said. Government is force; like fire it is a dangerous servant and a fearful master."
"Apologists for power will claim that without expansive government, the weak will be vulnerable to the strong, the masses to the rich. But that appeal falls apart when one reviews the history of government and realizes that, appearances aside, power ultimately sides with the strong and the rich against the rest. Indeed, power what Bastiat called legal plunder and shelter from competition is the source of their strength and a good deal of wealth."

Freddie Mac and Fannie Mae are Government SPONSORED Enterprises SHIELDED from competition.

Jun 19, 2012
no government must be peace,

Govt is the MONOPOLY on violence.
The US Constitution recognized this and limited that monopoly by guaranteeing its citizens the right to defend themselves with firearms.
The first step of any tyrant is to disarm the victims.
There is no world govt. The world lives under anarchy. How peaceful is it? It is much more peaceful when nations are freely trading with each other and have little fear of being invaded or attacked.

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