Crisis: more complex than just bonuses and greed

By James Hooper

Billions of people worldwide have been fundamentally and catastrophically affected by the economic crisis that took hold in 2008, a reality driven home by the recent documentary “Inside Job.”

Indeed, during the Academy Award winning film it is estimated that 50 million people around the globe have been driven back below the poverty line and many millions more have lost their jobs.

Tackling the complicated web factors that caused the crisis, the film exposes irresponsible deregulation of the financial industry spanning two decades, obscene mortgage lending practices and trading in often intangible derivatives.

It follows these as they are packaged by the million, inexplicably transforming from highly risky to AAA rated debt when bundled together and sold on to unknowing investors such as pension funds, before being insured against failure on a colossal scale and then bet against by the very banks that sold them.

The film proposes that at every step the process was driven by short-term profit, where the individuals involved, not bound by personal liability and with the prospect of huge bonuses, were compelled to break the balance of risk versus benefit.

Inevitably, personal profiteering played a critical role in the crisis, but to simply stop there ignores some much deeper issues. Why for instance, did no-one spot the problem sooner?

Surely there were employees inside the banks who understood the consequences of their actions, economists and government advisers who could extrapolate the result of this unregulated trading. Why didn’t someone speak up? This is where fundamental traits of human psychology come in, factors that can and do affect every one of us.

Through examining these behavioral phenomena, it is possible to see how evidence and even awareness of the impending financial catastrophe might not be acted upon or even actively ignored and pushed aside.

Perhaps the most influential of these is the cognitive dissonance effect. This is the process visible when people’s beliefs or understanding are contrary to an experience and they therefore seek to eliminate the discomfort of opposing factors.

Strangely, as Leon Festinger, the scientist who first recorded this trait found out, humans will rarely give up a strongly held belief and instead will often immerse themselves further in their irrational practices seeking validity and to avoid admitting errors of judgment.

This effect was prominently on view again recently following Harold Camping’s failed prediction of the rapture; instead rationalizing an apology, he has formed an unlikely explanation and reaffirmed his commitment that the world will now end in October convincing many of his followers along with him.

This very same process could clearly cloud the judgment of not only the bankers involved in the crisis but also those in government who oversaw the finance industry ― all strong proponents of the deregulation that allowed the malpractice to propagate.

Yet more reasons can be understood when parallels are drawn with research conducted into conformity and obedience. Humans place real importance on their value within a community and approval from authority, and related experiments have uncovered surprising results.

In 1958, a scientist named Asch showed that social pressure to conform to a group is so strong that more than 75 percent of people would answer obvious questions falsely to be in keeping with the people around them, an outcome explained by a desire to be liked and a belief that the group (or in this case the overwhelming opinion) is better informed than themselves.

Another scientist, Stanley Milgram, famously conducted trials which involved members of the public delivering what they thought were ever increasing electric shocks to another participant every time they answered a question wrongly.

Despite the howling protests of the actor pretending to receive the shocks, the participants were influenced by the instructions of a white coat wearing “authority figure” to the extent that not one of the more than 1,000 participants refused to participate before reaching 300 volts, and 65 percent continued all the way to 450 volts, a button labeled “Danger: Severe Shock XXX.”

These findings have been backed up numerous times, and patently show the obedience we all exhibit to those who we consider to be in control.

“Inside Job” is a film worth watching. It is thoroughly informative and uncovers deplorable corruption, malpractice and conflicts of interest. It has a genuinely intriguing and digestible narrative that cuts to the heart of the errors that were committed prior to the financial crisis, and more worryingly that continue to permeate through the banking sector.

However, to vilify those responsible by just blaming the bonus culture misses the social pressures that are at play behind their visible behavior.

In order to address the evident problems and bar their reoccurrence it is necessary to understand these paradigms and ensure that future reform takes their influence into account. There was greed, yes, but it wasn’t alone.

James Hooper is studying geography at Kyung Hee University in Seoul. He can be reached at james@james-hooper.com.