In meritocracies, though, it’s the very intelligence of our leaders that creates the worst disasters. Convinced that their own skills are equal to any task or challenge, meritocrats take risks that lower-wattage elites would never even contemplate . . . Robert McNamara and the Vietnam-era whiz kids thought they had reduced war to an exact science. Alan Greenspan and Robert Rubin thought that they had done the same to global economics. The architects of the Iraq war thought that the American military could liberate the Middle East from the toils of history; the architects of the European Union thought that a common currency could do the same for Europe. . . .
To which Daniel Larison replies:
Experts and technocrats can get things badly wrong, but the Iraq war is a good example of what happens when people embark on a large project while ignoring all the many experts who said that it was folly. Something similar could be said about the European project that Ross mentions in the same breath with Iraq. There were many people before and since the adoption of the euro who saw that a monetary union without comparable fiscal and political union would not function very well for long. The creation of the euro was an important part of the ideological project of forging European unity in defiance of historical experience and despite the resistance of many Europeans. In both cases, the people involved in crafting these projects were there because they endorsed the project’s ideological goals, and critics of both projects were ignored or dismissed largely because they did not have the correct ideological commitments.
I want to endorse both of these perspectives on the question at hand, but I think there’s an element missing from both Douthat’s and Larison’s accounts.
The European project was not a crazy one. It was the expression of two defensible political convictions: that formal unity was necessary to prevent a renewed outbreak of European war, and that formal unity was necessary to achieve sufficient “weight” in international affairs to hold their own vis-a-vis the United States (and, to some extent, rising future powers like China). One can argue about optimal currency regions and so forth, but I rather doubt, if it comes to that, that the United States or China constitute optimal currency regions; a great deal of policy is adopted for reasons other than some kind of theoretical economic optimality, and sometimes for very good reasons indeed. The salient fact about the European project isn’t that it was a crazy idea but that it was never successfully sold to the peoples of Europe. This is the “democratic deficit” that everyone talks about. Rather, it was adopted by steamrolling it into place, and then hoping that it “worked out” so that it would be endorsed after the fact. Precisely because it was adopted this way, indications that it wasn’t working out properly could not be listened to.
This is a pretty good description of how we got into Iraq as well. The Bush Administration came in with plans to go to war, whenever the opportunity might first present itself. That wasn’t exactly a secret – agitation for renewing full-scale hostilities with Iraq was open in the press and in the halls of Congress for the entire decade between the Gulf War cease fire and the 9-11 attacks. But that’s not the same thing as saying that the case was made, directly, either domestically or internationally. Rather, the policy was: steamroll, and then hope it works out so that it will be endorsed after the fact. Getting into war this way is one major reason why it was almost impossible for the government to recognize its errors once it had made them.
There wasn’t actually any steamrolling necessary to get the American mortgage debacle going, because greed, at all levels, did all the work needed to persuade. But why would Alan Greenspan have been interested in persuading a bubble into existence in the first place? Greenspan has, in retrospect, said that his great failure was in believing that Wall Street would be self-regulating because a financial crisis was not in anybody’s interest. But he understood that something had gone wrong well before that, back in 2002-2004, when he was actively urging a property bubble into existence in order to compensate for the collapse of the internet bubble. Greenspan understood full well what he was doing: he was encouraging people to leverage themselves more highly, doing cashouts and refinancings at lower apparent rates, even if they were taking more interest-rate risk down the line and increasing their exposure in the event of a hiccup in the housing market, because that boost to consumption would cushion the impact of the recession. Greenspan must surely have understood that a bubble, as such, cannot create wealth. The hope, though, was that it would get the economy “back on track” to where a recovery would be self-sustaining, and “back-fill” an increase in earnings power that would justify the higher housing valuations. Of course, that didn’t happen, and in retrospect it’s obvious that it wasn’t going to happen. But one had to believe that it would happen because, otherwise, one had to face the prospect that one didn’t know how to fight the recession effectively.
What these situations have in common is not arrogance – the assumption that, of course, whatever we do will work out and, if it doesn’t, well, that’s a problem for the little people, not for us. It’s insecurity. Dissenters weren’t dismissed because they were upstarts and nobodies who weren’t worth listening to – they were dismissed because if they were right then what were we going to do? If Greece wasn’t really meeting the criteria for EU membership, then what on earth are we going to do about it? Better not to see what they are up to. If housing valuations are wildly out of line with fundamentals, then what are we supposed to do to keep consumption up? And what are we going to do about the mountain of new, unstable mortgage debt? Better not to countenance the possibility of a nationwide housing correction. If invading Iraq is only going to make us weaker, then how are we supposed to establish that we are in control of events in the region?
Larison thinks that ideological thinking is what causes a refusal to accept threatening facts. I think that has the arrow of causation backwards: threatening facts are what prompt a turn to ideological thinking as a way of getting said facts out of the mental frame. And it is an insecure mind – insecure of its own judgment, or its own expertise, or its own authority, or what-have-you – for whom facts are threatening things.
Now, the reason for that insecurity is yet another good question, one I don’t have a good answer to. But, to return to Ross Douthat’s original piece, which opens with Jon Corzine, it’s worth pointing out that the kinds of traders who frequently get into the biggest trouble are those who haven’t learned to take a loss.