Hugo Dixon: Crisis, what crisis?

October 8, 2012

The credit crisis burst into the open five years ago. The euro crisis has been rumbling for over two years. The term “crisis” isn’t just on everybody’s lips in finance. Wherever one turns – politics, business, medicine, ecology, psychology, in fact virtually every field of human activity – people talk about crises. But what are they, how do they develop and what can people do to change their course?

The first thing to say is that a crisis is not just a bad situation. When the word is used that way, it is devalued. The etymology is from the ancient Greek: krisis, or judgment. The Greek Orthodox Church uses the term when it talks about the Final Judgment – when sinners go to hell but the virtuous end up in heaven. The Chinese have a similar concept: the characters for crisis represent danger and opportunity.

A crisis is a point when people have to make rapid choices under extreme pressure, normally after something unhealthy has been exposed in a system. To use two other Greek words, one path can lead to chaos; another to catharsis or purification.

A crisis is certainly a test of character. It can be scary. Think of wars; environmental disasters that destroy civilisations of the sort charted in Jared Diamond’s book Collapse; mass unemployment; or individual depression that triggers suicide.

But the outcome can also be beneficial. This applies whether one is managing the aftermath of Lehman Brothers’ bankruptcy, the current euro crisis, the blow-up of an oil rig in the Gulf of Mexico or an individual’s mid-life crisis. Much depends on how the protagonists act.

Students of crises are fond of dividing them into phases. For example, Charles Kindleberger’s Manias, Panics, and Crashes identifies five phases of a financial crisis: an exogenous, normally positive, shock to the system; a bubble when people exaggerate the benefits of that shock; distress when some financiers realise that the game cannot last; the crash; and finally a depression.

While there is much to commend in Kindleberger’s system, it is too rigid to account for all crises in all fields. It also downplays the possibility that decision-makers can change the course of a crisis. A more flexible scheme that leaves space for human agency to affect how events turn out has two just phases: the bubble and the crash.

The bubble is typically characterised by mania and denial. Things are going well – or, at least, appear to be. Feedback loops end up magnifying confidence. In corporations or politics, bosses surround themselves with lackeys who tell them how brilliant they are. In finance, leverage plays a big part.

This is not healthy. Manic individuals don’t know their limitations and end up taking excessive risks – whether on a personal level or in managing an organisation or an entire economy. As the ancient Greeks said, hubris comes before nemesis.

But before that, there is denial. People do not wish to recognise that there is a fundamental sickness in a system, especially when they are doing so well. For example, back in 2007 at the World Economic Forum in Davos, the greed was palpable. Market participants had such a strong interest in keeping the game going that they turned a blind eye to the unsustainable buildup of leverage.

The ethical imperative in this phase is to burst the bubble before it gets too big. That, in turn, means both being able to spot a bubble and having the courage to stop the party before it gets out of hand. Neither is easy. It’s hard to recognise a sickness given that there is usually some ideology which explains away the mania as a new normal. The few naysayers can be ridiculed by those who benefit from the continuation of the status quo.

What’s more, politicians, business leaders and investors rarely have long-term horizons. So even if they have an inkling that things aren’t sustainable, they may still have an incentive to prolong the bubble.

The crash, by contrast, is characterised by panic and scapegoating. People fear that the system could collapse. Negative feedback loops are in operation: the loss of confidence breeds further losses in confidence. This is apparent on an individual level as much as a macro one.

Events move extremely fast and decisions have to be taken rapidly. Witness the succession of weekend crisis meetings after Lehman went bust – or the endless euro crisis summits. The key challenge is to take effective decisions that avoid vicious spirals while not embracing short-term fixes that fail to address the fundamental issues. With the euro crisis:, for example, it is important to improve competitiveness with structural reforms not just rely on liquidity injections from the European Central Bank.

In this phase, there is no denial that there is a problem. But there is often no agreement over what has gone wrong. Protagonists are reluctant to accept their share of responsibility but, instead, seek to blame others. Such scapegoating, though, prevents people from reforming a system fundamentally so that similar crises don’t recur.

Crises will always be a feature of life. The best that humanity can do is to make sure it doesn’t repeat the same ones. And the main way to evolve – both during a bubble and after a crash – is to strive to be honest about what is sick in a system. That way, crises won’t go to waste.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Fear mongering has been around since the birth of politics. There will always be some crisis, and when it makes certain people rich and powerful to have the so called solutions, one thing is for sure. There will always be another crisis to be solved. And they will always be right there with the ready made solution for the problem they caused and aren’t held responsible for.

Posted by LysanderTucker | Report as abusive

For someone who argues that the solution to a crisis is predicated on being honest about its causes, you do a very bad job. The financial crisis is all about systems that went out of control because of human folly, and the criminal behaviour underlying that folly is par for the course. We are all responsible and therefore no one is responsible. Are you a joker or just a hypocrite of the first order. Balliol indeed!

Posted by Biscayne | Report as abusive

You state, “Crises will always be a feature of life. The best that humanity can do is to make sure it doesn’t repeat the same ones. And the main way to evolve – both during a bubble and after a crash – is to strive to be honest about what is sick in a system.”

What you describe is normal human nature, crises or no crises, and it is incredibly naive to say the least to argue we should strive to be honest as a solution.

Where were you raised, on some desert island somewhere?

The problem is that we must have laws to protect us from other people, and those laws must be enforced or they are pointless.

The last time we had a crisis like this it was circa 1929.

The US economy crashed for the very same reasons that it has crashed again. Failure to have in place an enforceable set of laws against the greed of the banking system and its investors.

Immediately afterwards we implemented a series of banking and trade regulations that forced a halt to the insanity we see now (“insanity” being loosely defined as repeating the same actions over and over, but expecting a different result each time).

The reason ALL of this has crashed again is not hard to figure out. Basically, the wealthy have succeeded in repealing ALL the banking and trade legislation that protected the American people from their excesses.

What we have left for banking regulations and free trade policy is a joke, except its not funny.

IF we wanted to stop this slide down a slippery slope towards economic collapse, all we need to do is to reverse the banking, tax and free trade legislation enacted for the past 30+ years that has permitted this to happen.

It human nature, stupid!

NOBODY will be honest unless they are forced to be.

Posted by Gordon2352 | Report as abusive

Oh, I almost forgot to add this to my comment above.

The banking and trade legislation has already been decimated in favor of the wealthy, but the tax laws are only partially crippled.

They will be decimated next year, no matter who wins, and the American middle class taxpayers will simply disappear to take their place among the poor.

Posted by Gordon2352 | Report as abusive

You plead for honesty, but provide none.

Here is an article from Der Spiegel on the potential problem of inflation due to the actions of the central banks.

Here is a small quote from the article entitled How Monetary Policy Threatens Savings:

“For the past five years, governments from Berlin to London and from Brussels to Washington have been in crisis mode. They rescued the banks in 2007 and 2008, then they stimulated the economy and, since 2010, have threatened to drown in their own debts. The burdens are being pushed up the line, from private investors to central banks and government bailout funds. But this doesn’t make the debts any smaller. In fact, the opposite is true, as the example of Greece and other countries shows.”

If you aren’t afraid to know the truth, the whole article is well worth reading. pe/how-central-banks-are-threatening-the -savings-of-normal-germans-a-860021.html

Posted by Gordon2352 | Report as abusive