Away from the flock

October 22, 2009

Companies need to actively encourage dissent and aspire to heretical rather than consensus views if they want to avoid being as unprepared as they were for the financial meltdown.

Noreena Hertz, professor of finance, sustainability and globalisation at Erasmus University in the Netherlands, kicked off the CFA Institute’s second annual European Investment Conference in Frankfurt with a wake up call for the assembled asset managers and bankers.

“This was not just a financial crisis – this was an existential crisis that exposed a faultline in the system,” she said. “The way we thought about the world was profoundly flawed.”

Hertz identified several major problems – a culture of intellectual conformity, the deification of experts like Alan Greenspan, and dogma superceding reason. She said the free-market economics that triumphed post-1979 should have been treated more as a hypothesis, not fact, but within economics debate was discouraged, and thinkers like Keynes and Minsky who didn’t fit the prevailing view were sidelined.

For their part, individuals and businesses had accepted orthodox thinking and allowed the proclamations of “experts” to go unchallenged. She urged delegates to think in a more holistic way – for example, rather than just focusing on rising house prices in the US, they should have given some consideration to the amount of credit cards the average household had.

Psychology also played a part. Investors had accepted Bernie Madoff’s ability to deliver an 11 percent return year after year because they wanted to believe it. “In the same way, you need to ask yourself whether the “green shoots” recovery story is so dominant because everyone is bored with bad news. Is it a political construct in the hope that it will become a self-fulfilling prophecy?”

Having unsettled delegates, Hertz offered them some hope. Replacing the individualistic “Gucci capitalism” that has predominated for the last 30 years she foresaw a more co-operative capitalism in which individuals took a more active role in helping solve complex problems like climate change, the demographic timebomb and sustainability. Everything to play for there.

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Did “free-market economics triumph post-1979″? Did governments not increasingly control interest rates, mortgages, and currencies? Can we have a free market with the most important prices controlled? As I argue in my recent book, Where Keynes Went Wrong, we have broadly followed the Keynesian playbook since World War II. And by the way, what does “Gucci capitalism” mean?

Very good point about the preparation required for companies given the risks in our financial system and economy. And I think that as an investor though one can only spend so much time focusing on the problems in the economy and criticizing the govt for its misguided policies, because the govt has proven, at least so far, that they aren’t going to change. So in order to actually profit from it, I think one needs to invest in sectors that should continue to benefit from these policies. In my opinion the gold price and the stocks of gold mining companies should continue to rise due to the Fed’s efforts to prevent any kind of deflation from occurring. And I just saw at http://www.goldalert.com that Claude Resources received a strong sign of support from the former CEO of Kinross Gold, one of the largest gold mining companies in the world. There are many unintended consequences of all the money printing and bailouts our govt is doing, and in my opinion, as investors people should pay close attention to these consequences.

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