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THE EMPEROR’S NEW CLOTHES


In my December 2019 article, I looked at some of the potential risks to financial stability, which have been all too evident for a number of years, though it remained unclear what might provide the catalyst to crystallize those risks.


But as I observed then: “context is of course always important, but in any post hoc analysis of financial crises, this will all too often show evidence of deep seated ‘wilful blindness’, and no small amount of hubris. All too often, the proverbial ‘plot is lost’ when process becomes confused with procedure, in general because as humans we like to think that once we have understood a process, we can then apply procedures to improve our perceived control over a process.” Whether one terms the Covid19 pandemic a ‘black swan’ event or not, the impact on the world economy and financial markets has been dramatic and extensive.


It has exposed numerous weak points both in the real economy and the financial sector, which governments, central banks and markets have tried to ignore or dismiss, and which are now being exposed in as brutal as was the case in the allegory of the ‘Emperor’s New Clothes’.


The world will get over Covid19, as with prior pandemics, though precisely when and with what longer term consequences remains to be seen. Nor is it the purpose of this article to speculate on that, but rather to ask some questions about some of the issues that the outbreak raises in terms of business practices, monetary and fiscal policy. The initial observation is that with markets having elevated central banks to the position of all-seeing and omnipotent purveyors of ‘panaceas’ for each and any one of the world’s economic woes, this is in fact a myth. Secondly, as is wholly unsurprising, after 10 years of ultra-low interest rates and more than $17.0 Trln of unconventional policy liquidity measures, the law of diminishing returns could not have been better demonstrated, even if this is a very inconvenient truth. The fact that so many wanted to deny it is a case of both ‘wishful seeing’ and indeed ‘wilful blindness’, and governments and central banks should look in the mirror, and consider it to be their ‘Picture of Dorian Gray’ moment. It should however be noted that this is not in any way to absolve markets of their responsibilities to lean against such myths, regardless of regulations. The ‘path of least resistance’ remains the equivalent of desertion in military terms.


These are very good example of Albert Hirschmann’s ‘hiding hand’ and ‘possibilism’ concepts. The principle of the “Hiding Hand” was a counter to the hegemony of neo-classical economics’ adherence to Adam Smith’s “Invisible Hand” (the principle that “the general welfare is best served by everyone catering to his private interests, legitimated total absorption of the citizens in their own affairs”). Hirschman above all challenged the latter’s over simplification of human behaviour into a set of axioms steeped in ‘laissez-faire’ and ‘rational choice’ dogma. In contrast to Schumpeter’s concept of ‘creative destruction’, Hirschman’s ‘Hiding Hand’ argues that creativity is the key problem-solving tool when we face unexpected situations; and that it is only via the experience of impotence when faced with the unexpected that we develop the innovative knowledge to solve problems, and that ‘rational choice’ often stifles innovation and creativity. “Possibilism” is an approach to escaping ‘straitjacketing concepts’ such as perceived “absolute obstacles, imaginary dilemmas and one-way sequences”, noting that such “obstacles” can often turn out to be an asset or, at the very least, a spur for change. Hirschman also argued that such “inverted sequences” should not be seen as having primacy over ‘orderly sequences’, but rather as a means to ‘increase the number of ways in which the occurrence of change can be visualized’. Both of these now seem to be appropriate as prisms through which to view the current set of dilemmas facing policymakers and markets.


POSSIBILISM” IS AN APPROACH TO ESCAPING ‘STRAITJACKETING CONCEPTS’ SUCH AS PERCEIVED “ABSOLUTE OBSTACLES, IMAGINARY DILEMMAS AND ONE- WAY SEQUENCES”, NOTING THAT SUCH “OBSTACLES” CAN OFTEN TURN OUT TO BE AN ASSET OR, AT THE VERY LEAST, A SPUR FOR CHANGE.


4 | ADMISI - The Ghost In The Machine | Q1 Edition


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