I’m sitting in a hotel overlooking the Hong Kong harbor and have been watching typhoon Hagupit roll in. The wind has risen; the light has fallen. Heavy rain is pelting the city. And boat traffic in the harbor has disappeared. Everyone is heading for shelter. Not a bad metaphor for the state of financial markets at present.
Given the government actions of the past week, investors should be feeling snug as if at home in front of a blazing fire with a mug of hot chocolate. But no. There is quite a bit of angst still in the market, witnessed by yesterday’s slump in stock prices, led by the financial sector. Columnists worry about how well last week’s rescue actions by the government will work.
I think there is a secondary explanation that complements the first. It has to do with investors’ disquiet about how the rescue was fashioned, and by whom. By way of illustration, here is a vignette, largely obscured by the outsized events of the past three weeks.
Alitalia, a state-owned enterprise, is in the final stages of a show-down with its unions that seems increasingly likely to result in bankruptcy and liquidation. While the airline’s on-time service, comfort, profits, or accurate baggage handling won no distinctions, the flight staff always seemed to do its work with a certain brio. Recently the press reported that the staff appealed to a higher power than Prime Minister Silvio Berlusconi for a satisfactory solution: they cornered the Pope and asked him to pray for a good contract. If that works for Alitalia, Henry Paulson should head over to the Vatican. The Feds have been creating state-owned enterprises at a rapid rate in the past three weeks (Fannie, Freddie, AIG, and probably a Resolution Trust Corp.) and will need all the help they can get. But Berlusconi is a realist: he insists that the unions should contribute meaningfully to any rescue plan for Alitalia. That story will conclude any day now.
Outcomes due to divine (or government) intervention are less satisfying. We would rather achieve a solution on our own. Humans want choice and the consequences that come with it. Intervention negates that. In literature, such intervention is called “deus ex machina” and is routinely scorned. Consider what Professor Professor L. Kip Wheeler has written,”DEUS EX MACHINA (from Greek theos apo mechanes): An unrealistic or unexpected intervention to rescue the protagonists or resolve the story’s conflict. The term means “The god out of the machine,” and it refers to stage machinery. A classical Greek actor, portraying one of the Greek gods in a play, might be lowered out of the sky onto the stage and then use his divine powers to solve all the mortals’ problems. The term is a negative one, and it often implies a lack of skill on the part of the writer. In a modern example of deus ex machina, a writer might reach a climactic moment in which a band of pioneers were attacked by bandits. A cavalry brigade’s unexpected arrival to drive away the marauding bandits at the conclusion, with no previous hint of the cavalry’s existence, would be a deus ex machina conclusion. Such endings mean that heroes are unable to solve their own problems in a pleasing manner, and they must be “rescued” by the writer himself through improbable means.”
“Lack of skill…the heroes are unable to solve their own problems in a pleasing manner…” That well describes some of the murmuring I’ve heard regarding the rescue of last week. In contrast, the several rescues during Panic of 1907 were managed entirely by figures at the center of the financial community. And in 1998, the collapse of Long Term Capital Management, which gravely threatened the stability of financial markets, was met by a syndicate of financial institutions who absorbed LTCM’s liabilities. In 2001, the private sector absorbed the spectacular collapse of Enron.
What is different about today’s crisis (as discussed in a previous posting) are its huge scale, high complexity, and speed of contagion. Relief about the rescue seems tinged with annoyance that the financial sector couldn’t clean up its own mess. Europeans are diplomatic, but plainly chagrined toward the U.S. about the financial crisis. And in today’s South China Morning Post quoted a fund manager, “Investors should be reminded that government interventions often backfire eventually.”
Last week’s rescue of the financial markets by the U.S. government is a deus ex machina ending of Jovian proportion. The threats to the global economy were similarly Jovian and that the financial community appealed for government intervention when it had run out of ideas and funds. But asking for intervention—divine or governmental–in commercial matters is tricky. Mythology is full of examples where the gods took a contrary view to that of the petitioner.
That typhoon outside is getting really impressive. I’m going to look for a fireplace and some hot chocolate.
Posted by Robert Bruner at 09/23/2008 07:03:52 AM