The Lack of Knowledge Depression

Our Epistemological Depression — The American, A Magazine of Ideas

I'm starting to love that word even more. Epistemology, the study of knowledge and of the limits on man's ability to know.

In many cases, even more importantly, our willingness to jump to anything that SEEMS like knowledge because it "sounds good enough". We don't really like to think about complex things much, even less if the answers turned out are grey to maybe negative, vs nice quick judgments that seem to show our enemies to be wrong, evil and deserving of punishment while showing those that we like, and above all, ourselves to be brilliant and morally above reproach!!

So with our current financial situation, the congress, the president and the MSM grind away about "greed, rich folks and the failures of Wall Street" -- and how in hind sight, it is all so "obvious".

These factors have received a good deal of attention. But they are not the whole story, and certainly not the most original part of the predicament. What seems most novel is the role of opacity and pseudo-objectivity. This may be our first epistemologically-driven depression. (Epistemology is the branch of philosophy that deals with the nature and limits of knowledge, with how we know what we think we know.) 

That is, a large role was played by the failure of the private and corporate actors to understand what they were doing. Most heads of ailing or deceased financial institutions did not comprehend the degree of risk and exposure entailed by the dealings of their underlings—and many investors, including municipalities and pension funds, bought financial instruments without understanding the risks involved. 

We should keep this in mind when we chastise government agencies such as the SEC for failing to monitor what was going on. If the leading executives of financial firms failed to understand what was taking place, how could we expect government regulators to do so? The financial system created a fog so thick that even its captains could not navigate it.

The article goes into a quite a bit of detail about how the financial firms were thinking and operating and that when it all went down, all the "features" that were supposedly there to "keep them safe" -- diversification, hedging, fancy mathematical models and "insurance" all turned against them and aided in the fall.

Confidence cannot just be conjured out of air. Nor can it be created with injections of capital or fiscal stimulus. It will be rebuilt to the extent that financial institutions take actions that lead us to believe that they know what they are doing. And they are more likely to know what they are doing if they are smaller, less diversified, and less engaged with financial instruments that are too clever by half. 

Some recent policies seem likely to exacerbate the problems I’ve outlined. Take the Treasury’s encouragement of institutional consolidation through amalgamation. Bank of America was encouraged to take over Merrill Lynch; and JPMorgan Chase took over Bear Stearns, and then bought the assets of Washington Mutual. Whatever the purported advantages of these takeovers, the creation of ever larger and more diversified companies makes it more likely that these firms will be plagued by the epistemological problems noted above. The Treasury has created more firms that can’t really be understood (or whose riskiness can’t be assessed)—not by their managers, not by government regulators, and not by investors. 

To speak of a crisis of financial epistemology may sound abstract, but it has had very concrete and disastrous consequences. Understanding this underrated aspect of our current crisis is a prerequisite for getting us out of the hole we’ve dug ourselves into.

I think that McCain was more right than we know when he discussed the "recession" in early '08 as being more mental than anything. In the late '90s, the MSM was VERY worried that impeaching Slick Willie would "hurt the economy". Somehow, when it came to casting the Bush administration as completely corrupt, incompetent and to talk about the economy as "depressed", before anything severe had even happened, there was suddenly no "confidence issue".

As in a lot of things, confidence is a lot easier to destroy than it is to build -- like economies, countries, investment accounts, relationships, careers -- and so much more. It can take decades for the things to be built (or longer), but usually, it is possible to destroy much if not all of what was built in a very short period of time. Look at how successful the Democrats have been! They only took over congress in '06, and the WH and filibuster proof congress in '09, and already we have the worst economic numbers in at least 25 years and the largest deficits by all measures in the history of the world!