I’m fascinated by the narratives of the financial crisis that basically cast it as a mass deception. Clearly we need to develop a scale of deceptive practices and think about how this all relates to the social construction(s) of reality(ies). At the simple end there are the flat-out lies, for example those told by the peddlers of certain types of mortgages, but things quickly get more complicated. There are the accounting tricks used by big banks to understate their risk exposure (for example, a Wall Street Journal headline on April 9, “Big Banks Mask Risk Levels”, tells much of that story). There are the practices being revealed by the investigation of Lehman’s Repo 105 and related practices, as illustrated in the New York Times April 12 story, “Lehman Channeled Risks Through ‘Alter Ego’ Firm”. And of course there is the unfolding SEC case against Goldman Sachs allegedly “misleading” investors about the quality of securities linked to subprime mortgages, as detailed in yesterday’s Wall Street Joural. But these are surely only the tip of the iceberg.
Beyond and beneath the overt fraud and lying are more insidious forms of deceit, insidious because they are more difficult to pin down and identify as deceptive. There is the deceit lurking in the very complexity of our postmodern financial practices — this is nicely illustrated in an interview by Christopher Lydon of Michael Lewis, who has seamlessly morphed from sports writer to chronicler of the dark side of financial capitalism. On the web-page that hosts the interview (from Brown’s Watson Institute, no less!), there is a great quote from Lewis where he says “complexity becomes opacity.” I would go further and say that deceit comes to lurk in complexity. And at still another level down, there is the Simon Johnson and James Kwak argument in 13 Bankers (a book that has its own website — yikes!) that not only was there regulatory capture of the US government by financial firms, but also ideological capture — the dissemination of a world view. To quote from Johnson and Kwak’s introduction: “No conspiracy was necessary. Even Summers, a brilliant and notoriously skeptical academic economist…was won over by the siren song of financial innovation and deregulation. By 1998, it was part of the worldview of the Washington elite that what was good for Wall Street was good for America” (p. 10).
Shouldn’t social constructivists be all over this stuff? Well, there is the one little problem that if you posit that reality is socially constructed, then how do you distinguish socially constructed and accepted lies from socially constructed truths? Especially if the “lies” are accepted as truths? The way I’ve been dealing with this in my work on hypocrisy (a piece of this work is coming out in Blyth, Abdelal, and Parsons, eds. forthcoming Cornell book, Constructing the International Economy) is to treat alternative “versions” of truth as contending constructions. But I think this sort of washes out the moral judgment that some sort of deception has been practiced, and that deception is wrong. If you cannot evaluate deception against a “hard truth”, then what sort of criteria are available? I’m thinking the Duck might be a good place to fire off that question, though I don’t want the answer to hinge purely on methodological issues. If the financial meltdown was at least partly a consequence of mass deception, then does the issue in practical terms boil down to a question of whether a mass deception is sustainable over time? You could look at money that way, maybe, as a sustainable (usually, though maybe not in Greece right now) mass delusion. So what makes a mass delusion sustainable, as opposed to unsustainable? Actually I’ve now typed myself to the edge of a philosophical abyss but instead of deleting this post I’m just going to post it.