Have faith: two and two still makes four
THE big money is chasing a commodity that cannot be bought or sold on the open market; it is a quality that defies precise definition, but which everyone recognises; it is both invaluable, and without monetary value; it is, at the moment, the most sought-after stock in the world. It is confidence.
Confidence is the soul and fuel of finance. Too much results in speculative mania, bubbles, gluttony and swindling -- in "prestidigitation, double-shuffling, honey-fuggling, hornswoggling and skulduggery," as one US economist put it in 1929. Too little destroys credit, and the gears of finance seize up. None at all leads to panic.
The Germans have a word for what happens when ordinary people lose confidence and rush to sell: Torschlusspanik, literally "door-shut panic", getting out before the gate slams.
The present crisis was sparked by toxic debt and a farrago of financial hornswoggling but, at a deeper level, it is about emotions and feelings that have little to do with reason, percentages, profit or loss. A full-scale financial panic, like the irrational exuberance of a speculative boom, is a collective, contagious madness.
Once baseless fear takes hold, of course, it becomes rational to follow suit.
"I can calculate the movement of heavenly bodies," Isaac Newton said. "But not the madness of people."
He was not immune to the madness himself, losing a huge £20,000 when the South Sea bubble burst in 1720. That speculative orgy showed what happens when there is a confidence glut. Investors poured money into the madness, investing in pure confidence.
Markets, theoretically, work on mathematics, solid numbers that may be totted up to produce broadly predictable outcomes, but money itself works on intangible and unquantifiable trust, something close to faith. We exchange banknotes because we believe in them. A collapse of financial confidence is, in many ways, a crisis of faith.
A run on confidence provokes a sort of monomania. In 1929, Claud Cockburn reported on the mood on Wall Street: "In New York, you could talk about Prohibition, or Hemingway, or air-conditioning, or music, but in the end, you had to talk about the stock market."
In New York last week, I found that you could talk about the election, or Hemingway, or the Yankees, but the only conversation with real currency was financial, deadly serious and doom-laden.
The economist John Kenneth Galbraith came closest to defining the essence of confidence. "Trust is essential for a boom," he wrote. "When people are cautious, questioning, misanthropic, suspicious or mean, they are immune to speculative enthusiasms." Restoring that "pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich" requires showmanship, as well as money. Speed, clarity and boldness are essential.
The economist Bernard Baruch put it best. Writing from the pits of the Great Depression in 1932, he observed: "If, even in the very presence of dizzily rising prices, we had all continuously repeated 'two and two makes four', much of the evil might have been averted."
Similarly, even in the general moment of gloom in which this is written, the appropriate abracadabra may be: "They always did." As governments struggle to concoct the elixir of confidence, it is worth repeating that two and two still make four, and they always did. (© The Times, London)
- Ben Macintyre
