The failure of listening

We’ve just played the highest stake game of guess-the-number: The market was thinking of a number and the government was supposed to guess it. Lehman folding? Bzzzt. That’s not the number. Bailout of money market funds? Bzzzt. Think higher. $700 billion to buy toxic loans? Bzzzt. Wrong again. Buying equity in banks? Ding-ding-ding, you win!

Why wasn’t the government better at listening to the market? Did it ever ask what it should do?

That’s not the way government thinks. But it’s the way it should learn to think. There need to be systems to listen and expectations that we out here should speak. In a representative democracy, government doesn’t always need to act on what it hears. But now it can’t hear.

Government and regulation will need to be transparent and interactive in this, the Google economy.

  • Mark H.

    The “government” will never think that way until they get back to the basics that our country was founded on. They’ll never do that without term limits and they’ll never vote for same, so we’re left to hope we can resurrect some semblence of order from the coming crash of society.

  • Jeff,

    This failure to listen is a particular characteristic of the current administration and its “shoot from the hip” attitude. In its waning days this administration is not likely to change its ways. Hopefully the next administration will show more humility and thus a greater ability to listen and take into account various points of view.

    I wonder, however, whether the American system is well suited to the kind of transparency and interactivity you advocate. With the president elected to a four-year term, and senators to six, there is little need to respond to near-term public pressure. Representatives have the opposite problem — their two-year terms mean they’re constantly pandering and positioning in order to keep their seats.

    Contrast this with the parliamentary system here in the UK, where an election can be called at any time and where a party in power can remove its own leader, the Prime Minister, and replace him or her if enough demand it — and where on a weekly basis the Prime Minister must stand up in Parliament and defend his positions.

    And who was it who seemingly has made the right call in this financial crisis? Gordon Brown, who perhaps has been the most beleaguered Prime Minister in modern times as he has sought to defend himself against a resurgent Conservative party as well as growing and vocal dissent in his own party. Knowing his political future was at stake, if nothing else, he has risen to the occasion.

    Contrast this with the equally beleaguered President Bush, who in spite of the widespread disgust with his presidency is long past the point of accountability and thus has no incentive to act. So he sits in the White House dithering.

    This is a simplification of course, but as someone who is privileged to be able to vote in both the US and UK I increasingly wonder whether the US would be better off with a parliamentary system. Fat chance, of course. But is this not closer to the type of transparency and interactivity you would like to see in the US?

    Kind regards,
    Evan Rudowski

  • As Evan points out, the American system of governance is not suited to being directly and immediately responsive to the desires of the people. That is by design. The Founding Fathers quite wisely established a system wherein populist desires are balanced against thoughtful consideration (roughly, the House vs. the Senate).

    Responding to the ever-changing whims of the American people would create a chaotic government subject to wild swings of policy. Moreover, aligning laws and regulations with strongly-held opinions of the short-term would threaten the long-term stability and prosperity of the nation as a whole.

    Jeff, what you describe in your first two paragraphs sounds a lot more like direct democracy rather than representative democracy. Yet you go on to correctly note that our system requires that government officials listen to the public, not that they do their precise bidding. Regular elections provide the opportunity for the people to express their overall level of approval for the interpretations made by politicians.

    As for the current crisis, it is not correct to say that the government did not consult with the market or listen to it or the American people. In fact, some would probably argue that in this instance it has listened too much to what the market wants. But the bottom line is that government leaders of both parties had discussions with Wall Street leaders, banking officials, economists, and constituents. Moreover, one need only watch CNBC to hear a variety of viewpoints and advice for government action — something that many government officials have certainly done.

    While I believe in the Internet’s ability to provide new avenues of transparency and communication, it would be a mistake to use those tools as the primary basis for governing and policy-making in the future. It is but an arrow in the quiver.

  • Why wasn’t the government better at listening to the market?

    If this government is a democracy, the “market” is the last thing the government should be listening to. In financial markets, votes are assigned in proportion to the amount of capital deployed, not to the citizenry. A democracy, by definition, listens to its citizens first and foremost.

    BuzzMachine’s ideology — that the government of the United States should be at the beck and call of financiers — takes us back to the time when the Bank of the United States was in private hands. Where is President Andrew Jackson when we need him? The reason he founded the Democratic Party was precisely to put control over finance in the hands of the people.

    It was not Nobel Laureate Paul Krugman’s original line, but he quoted it with attribution on ABC’s This Week roundtable on Sunday. When the Treasury Department runs a revolving door for executives of Goldman Sachs, the United States financial system, Krugman argued, has been subject to “Cognitive Regulatory Capture.”

    Making that capture even more supple and responsive, as BuzzMachine suggests, seems to be a case of “when you are in a hole, keep on digging.”

  • Andrew,
    I wouldn’t go so far as to call it ideology. It’s tactics. Their entire effort was to end panic and instill confidence in the market and they tried to do that – failing often – without knowing the market’s reaction.
    And the question here is who’s the market? Is it just Wall Street or is that us in re the stocks we buy and sell or is it us in re our Christmas shopping? Where’s the need for confidence and trust and how do we accomplish it?
    They only guessed.

  • Jeff —

    You cannot really be suggesting that the results of a single day of trading — a DJIA advance of 935 points — is the metric we should use to gauge whether a government policy is in the public interest or not. Granted, it could well be that a partial nationalization of the major banks actually turns out to be appropriate public policy and that ending panic and instilling confidence is a desirable end, not just for the “markets” but for the democracy as a whole…

    …but your suggestion that a day’s action on the trading floor should be used as the litmus test for judging such macroeconomic policy is preposterous.

    Try a thought experiment. What if the last five years of stock market action turns out to have represented an asset bubble inflated by misguided monetary policy that misallocated capital away from infrastructure investment and productive capacity, channeling it instead into nonproductive financial and real estate speculation? If so, 8500 on the DJIA may turn out to be the appropriate value to attach to the atrophied productive capacity of major industrial corporations, not a misguidedly low price that has to be corrected.

    It could be that the correct “message from the market” that the government should listen to is the bear market signal that its policies have been wrong for five years — not the one-day bounce back implying that its recent partial nationalization effort might have hit the nail on the head.

    You say the government should “listen to the market.” Yet, not only does market speculation frequently misallocate capital, your example seems to advocate listening to it only selectively. Correct me if I am wrong, but you imply that the government should only “listen” when the market goes up; it should reflexively assume that a low level of stock values is incorrect and read it as a message that its policies should change.

    Thus the “ideology” I perceive in your advice: any economic policy that does not inflate financial assets is not in the public’s interest.

    But bubbles inflate asset prices and when they burst they create the mess — clearly not in the public’s interest — that we are in now.

  • invitedmedia

    i saw it as so many others- wall street holding a gun to its own head.

    i thought ‘fire away’ was the ‘ding-ding-ding’ answer.

    we’d pick up the pieces and go on.

  • Andrew,
    You’re being awfully unironic for a Brit.
    I’m saying that the sole goal of the governments’ actions was to make the market happy and only after trying five things did they succeed, so why the hell didn’t they just ask.
    I’m not saying that is the proper metric of success.
    But the market is still the ultimate definer. Just depends on how you define the market, eh?

  • Andy Freeman

    > only after trying five things did they succeed, so why the hell didn’t they just ask.

    Who would/should they have asked?

    Surely Jarvis doesn’t think that the pundits who say things like “the market went up because Alcoa reported record profits” are reliable sources, so he must have someone specific in mind.

    And, while we’re at it, how does Jarvis know that “the market” wasn’t waiting for all five things?

  • Hah, I think your post here is dead on. They kept banging away until something clicked.

    Having worked in finance since before the Crash, I can tell you that there is no way in hell anyone could have predicted which initiative would actually work. Lou Dobbs should go back to his Science blog.

  • Don’t mistake a dead cat bounce for a reversal of sentiment. The markets around the world have resumed their declines, just, for the moment, at a slower rate.

    The NY Times this morning is filled with stories about the present recession/depression. So, at least, the media hasn’t changed its sentiment – if anything it is more negative.

    If this downturn resembles the one in the 1970’s, which also had us losing a war, failing to raise taxes to pay for it, and an oil shock, then the 40-50% stock slide will be followed by high inflation and a long period of very slow recovery in stock prices.

    In the 1970’s it took a full decade for stock prices to reach the previous S&P high. I’m of the opinion that the rules of finance haven’t changed and that the world governments printing money to inject into the banking sector has to lead to a rise in inflation at some point. It is odd to see so little discussion of this.

    It is, of course, in the interests of the banking sector to avoid talking about inflation, since the prospect of inflation would make it harder to borrow funds over the long term and/or force them to pay higher interest to compensate for the future devaluation of value of fixed interest bonds in an inflationary economy.

  • jeff — sorry about the lack of irony, but does today’s 733 point DJIA selloff mean that Monday’s nationalization policy was a mistake after all?

  • invitedmedia

    crappy volume on today’s decline means it probably ain’t over.

    they got the ‘wad’, now they want to be able to suspend mark-to-market.

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