Keynes on Why Bankers Didn’t Avoid Danger

E. Forrest Christian Change, Financial crisis 9 Comments

I asked Warren Kinston about something I had recently written regarding Imaginist thinking and Obama’s success. (He points out that Imaginist isn’t appropriate at societal level; I was wrong and should study more.) But that got me thinking about the values in play, and I returned to hisWorking With Values to look at Ethical Choice. Warren is describing the Conventionalist approach but quotes Keynes. Oddly, this explains why today’s bankers — who almost all knew that the financial world was going to implode and possibly destroy the world’s financial markets — didn’t do anything:

Conventionalist choices are dominant in all societies and social groups. Despite the value which is assigned to enterprise and achievement in the West, failure is often preferable to success if that means violating convention. Keynes once noted that ‘a sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way with his fellows, so that no-one can really blame him.’

The quotation comes from “The Consequences to the Banks of the Collapse of Money Values”, an popular-press essay Keynes wrote in 1931, before the collapse of banking across the world and the complete collapse of the markets. Keynes’s essay is interesting to look at because it discusses how what Kinston calls ethical choice comes into play in even something so supposedly “rational” as banking. As Kinston points out, “rational” is an approach of ethical choice.

Here’s the Keynes quotation in context.

[p. 176-177] It is for this reason that a decline in money values so severe as that which we are now experiencing threatens the solidity of the whole financial structure. Banks and bankers are by nature blind. They have not seen what was coming…. A ‘sound banker,’ alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.

But to-day they are beginning at last to take notice. n many countries bankers are becoming unpleasantly aware of the fact that, when their customers’ margins have run off, they are themselves “on margin.”

…………….

[p. 178] It is necessarily part of the business of a banker to maintain appearances and to profess a conventional respectability which is more than human. Lifelong practices of this kind make them the most romantic and the least realistic of mean. It is so much their stock-in-trade that their position should not be questioned, that they do not even question it themselves until it is too late. Like the honest citizens they are, they feel a proper indignation at the perils of the wicked world in which they live, — when the perils mature; but they do not foresee them. but they do not foresee them. A Bankers' Conspiracy! The idea is absurd! I only wish there were one! So, if they are saved, it will be, I expect, in their own despite.

[Keynes, John Maynard. 1931/1991. “The Consequences to the Banks of the Collapse of Money Values”, inEssays in Persuasion. New York: W. W. Norton & Company]

Bankers indeed failed to prevent their collapse in 1932. In our current collapse, financial experts all knew that something bad was likely to occur but felt that they could not do anything and remain either (a) employed or (b) respected. Better to fail conventionally with everyone else than to be branded an extremist, even if that saves your livelihood.

People are not completely rational in their market choices and will often do what appears to be counter to their survival. As in our financial markets today.

(A quick aside: it may well be that time-horizons played a large part in our present collapse, where something that should have been managed at a longer time-horizon was run by those without them. There’s also the sociopath problem, of course, but the sociopaths you shall have with you always, until the end of the age.)

This led me to looking at some more current conversations about Keynes. His ideas are not those of the current leadership at the Federal Reserve or the Treasury. I was raised on Friedman, so finding James K. Galbraith’s 25th Annual Milton Friedman Distinguished Lecture at Marietta College may seem more related than it actually is. Galbraith argues that Friedman was simply wrong about how reality works in his monetary theories.

Finally Hyman Minsky taught that economic stability itself breeds instability. The logic is quite simple: apparently stable times encourage banks and others to take exceptional risks. Soon the internal instability they generate threatens the entire system. Hedge finance becomes speculative, then Ponzi. The system crumbles and must be rebuilt. Governments are not the only source of instability. Markets, typically, are much more unstable, much more destabilizing. This fact that is clear, in history, from the fundamental fact that market instability long predates the growth of government in the New Deal years and after, or even the existence of central banking. We had the crash of 1907 before, not after, we got the Federal Reserve Act.

[James K. Galbraith. March 31, 2008. The Collapse of Monetarism and the Irrelevance of the New Monetary Consensus [PDF]

It is perhaps that Internet-time, that bane of marketers everywhere, has simply increased the speed at which we can destroy ourselves.

About the Author

Forrest Christian

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E. Forrest Christian is a consultant, coach, author, trainer and speaker at The Manasclerk Company who helps managers and experts find insight and solutions to what seem like insolvable problems. Cited for his "unique ability and insight" by his clients, Forrest has worked with people from almost every background, from artists to programmers to executives to global consultants. Forrest lives and works plain view of North Carolina's Mount Baker.  [contact]

Comments 9

  1. I couldn’t resist commenting here. I will make it short because of time:

    -people are not rational, it is only an illusion, or delusion (your preference here) perpetuated by those interests it serves

    -while values are key, the underlying motives are essential here, e.g. if I am interdependently motivated unconsciously, i will seek the protection and association from others…if i am low power, i will not seek to be the stem that seeks to be chopped off…if i am motivated “away” from conflict, i will avoid anything that conflicts–my point, it’s not whether i settle into conventional frames or not (as this may serve my underlying ends by these means), but more particularly what my unconscious motivational architecture dictates UNDER specific life conditions + my self-awareness

    -self-awareness mitigates any values, or motivational architecture allowing sophistication of the structures, form and matter of meaning…

    –imagine the stratum of most bankers in terms of their functioning working capability, few if any touch 4, which means the focus on their processes to the exclusion of simultaneously occuring processes affecting my processes are hardly noticed and certainly not important.

    –i watched as the CEO of Lehman testified before Congress and stated that he was caught completely unaware of any serious problems, such as those that toppled his company…he’s either a blatant liar, or a perfect example…

    mike

  2. What has been occurring with the banks, and now with the automakers, are symptomatic indications of the forthcoming collapse of the entire global economic system. Following this we can anticipate the decline and fall of present political systems of governance, continued propogation of war in the name of God and humanity, and social decline to chaos. The fact is that because the major systems are presently not integrated and synthesized to a universal purpose and meaning, aligned with the will of the Universal God, globalism is predicated on the false belief that a sustainable economy is the key to humanity. The key to life is synthesizing all of the systems necessary to sustain life, within a safe and healthy evolving global environment that meets these needs.

    The essence of insanity within the current economic capitalist crisis, and society in general, is clearly visible when ordinary citizens are financing failing capitalist corporations with the remittance of their tax dollars brokered through the government so these capitalist entities can exploit their existence again to the benefit of few and the suffering of many.

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    Mike, these are good points. Since I knew about the banking crisis and I’m not a banker, and since people have been warning about the subprimes derivatives for at least two years at the Federal Bank level, and the American public radio even did a special on it, it’s hard to not see him as being less than candid. Many bankers did avoid this crisis. They also avoided some massive profits and salaries during the boom.

    People aren’t rational, surely. They may act in ways that are consistent with their selves, but that’s different. (I’m pretty sure that “all learning is affective” is close to the truth.)

    “Values” is a difficult word because we make it do too many things. Kinston argues that Values are part of Purpose, but only higher level Purpose. I find his taxonomy helpful here. For example, I may be interdependently motivated unconsciously but still not seek the protection and association from others because the others available to me are not part of my “Tribe”: I cannot trust those who are not “one of us”, even if I am the only “us” in this region. Also, one’s unconscious motivations will be useful in determining one’s career, at an unconscious level (where one can choose a career: not true in most of the world).

    Kinston means something particular with “Conventional”. His work requires specific definitions, or at least seeing it in the greater framework so you can compare things. I think he would not have any strong disagreement with what you are saying, although y’all would argue at length about specifics. As is the way in the world.

    Al – I think we’ve dodged the bullet of the end of Money. But surely further economic decline is almost a sure thing, as is the rise of Despotism and Wars. I find the rising tensions between India & its neighbors interesting but won’t put money it even being an Indo-X war. Oddly, as we are continuing to see, the slightly better than wretched life in the developing world was largely occurring because of trade with the EU and NorthAm, and they will be suffering the brunt of this massive “adjustment”. (There are lots of imperialist arguments that can be made here.) There are wildcards in all of this, including the pandemic that’s necessary to make this hand of despair complete.

    Al has a new article out that I’ll be posting for him here. I’ll announce it in a separate post.

    All of this is worth considering further at length.

  4. The fundamental problem is humanity in its current existence is rapidly becoming the pandemic it fears most.

    I would not promote that the failing of commercial and monetary systems are inevitable. In fact economic systems of commerce and currency are essential to the whole. The problem is we view them as the predominant system in a hierarchial order in society. Said another way humanity has believed for the past 4,000 years that the key to its successful evolution is effective economic systems first and foremost and that with this in check everything else follows. The problem with the global economic paradigm is it leaves too many paople behind. It is divisive and coupled with all of the other special interests derived from specialized systems that are not viewed within the context of the functioning whole chaos and anarchy abound.

    In Afghanistan at the moment we are seeing the continuation of a 14 century holy war that started because the predominant organized religions of the day would not accept the enlightenment of the prophet Muhommad. The Iraq war, acknowledged by Bush yesterday, was an error brought forth by the false allegation of possession of weapons of mass destruction; fought in the name of the free world and humanity.

    The problem, is that human beings view the body, governing systems, economic and social systems as dissociative and disconnected with eachother, with the whole, with the globe and with the universe.

    The theory I forwarded to you presents this in reference to medicine. One of Elliott’s early contemporaries from CRA found it too scientifically medical to make any sense out of it but has proposed a call in January. Intergated Systems Theory applies universally and assists in the understanding of many of the problems the world is presently facing.

  5. Great post, can you please tell me or point me to the direction of Keynes’ paper “The consequences to the Banks of the Collapse in Money Values,” 1931???

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  7. I’m no economics expert by far, but I’ve been reading up a little on Austrian economics. For an alternative to Minsky and Keynes – http://mises.org/daily/2787. Thomas Woods, Jr.’s Meltdown book is good too.

    I tend to think Mike Jay is probably right about work capabilities of most bankers, although I have nothing to back up that impression.

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    I don’t think any economist got the psychology of the failures as accurately as Keynes. I’ve always enjoyed the Austrians (Hayek has survived several moves over the last 20 years) but I’m not always as confident that they have a good grasp on how most humans actually behave.

  9. Pingback: Bankers, Always the Last to Know – Mises Canada

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