Sunday, October 26th, 2008
in him we trusted

In the early years of this decade, I had the opportunity to teach MBA candidates who were interested in becoming investment professionals.  To try to get them to explore their belief systems, I would start one lecture by writing a phrase on the board:

The exercise was inspired by the book Simulations of God:  The Science of Belief by John C. Lilly.A scion of a St. Paul banking family, Lilly was a pioneer in the study of consciousness.  His research was either “cutting edge” or “far out,” depending on your perspective, and The Day of the Dolphin and Altered States were Hollywood attempts to popularize his work with dolphin communications and isolation tanks respectively.  Coincidentally, his brother David was the former dean of the school where I taught. Inevitably, the blank would be filled most frequently by one name:  Greenspan.  That was not a surprise, since immediately inside the door to the trading room for the student fund a framed color head shot of the Fed chairman had been hung in his honor.the research puzzle | Such a placement is typical for an object of adoration.  In an earlier posting, “gazing upon the icons,” I explored some of the aspects of devotion that manifest themselves in the investment markets, using as one example the story of Cisco Systems.  Until that company’s growth evaporated, when I pushed students for specific stocks that had earned their trust, writing “Cisco” in the blank was very common.

On Thursday, that same Alan Greenspan was brought to Capitol Hill for a public confession.  His testimony,Committee on Oversight and Government Reform | Here are the statements of Greenspan, Christopher Cox, and John Snow, as well as a transcript of the hearing. as has been reported and parsed elsewhere, featured the admission that the markets had proved him to have been wrong about key aspects of the philosophy he applied during his eighteen-plus years of oracular actions and pronouncements, so willingly believed by our elected officials during his earlier visits to the Hill.

Enough about him — what about us?

While there were doubters,The Mess that Greenspan Made | For some writers, Greenspan was “Easy Al,” for his willingness to respond to every problem with loose money.  His actions during the Nineties earned him the name, despite his famous wringing of hands over “irrational exuberance.”  More recently, Tim Iacono began a blog in 2005 that chronicled the “mess” that the Fed chair had created. as there always are, they were viewed as kooks (as they always are) — those that didn’t understand the magic and importance of Greenspan’s unique blend of insight and instinct.  So widespread was the belief that he would do anything in his power to protect the market that the “Greenspan put” (apparently available without cost to every portfolio) guided investment strategy and public policy.

It has been demonstrated that such protection was worthless in the long run, and now we find ourselves in a market environment for which the key missing ingredient is trust, the very thing we had misplaced before.  At some point, the workings of the market will heal the wounds at the heart of the system, and we will return to some sort of normalcy.  Soon enough there will be fads, stocks, prognasticators, systems, and all manner of other things that look worthy of our belief.  At that point it will be useful to remember that the only thing immutable is our ability to be fooled.