Journal Insight on Banking: Avoiding Rational Behavior as a Long Term Survival Strategy

Interesting reading in the Journal–for all you barbarians, that means, The Wall Street Journal, duh!–today. “Housing Cycle is Caught in A Vicious Circle,” by Scott Patterson. As a fan of horror, couldn’t pass up this article.

I think of the economy mainly as a circle just like the rest of the universe, but a Vicious circle. A circle of death. John Geanakoplos says that “a negative-feedback loops are driving today’s economy.” I can picture a fleet of shiny black HumVee’s TM each being driven by that Walmart TM smiley face who slashes prices, but this time, his eyebrows are pointed in a V, his smile is Vicious. He’s the vicious circle of death.

My favorite line is this chestnut, “Individual banks might be acting rationally when demanding more and better collateral. Trouble is, when every lender does this, it becomes self-destructive triggering shock waves that threaten banks, themselves.” OK, Mr. SmartyPants TM, sounds good. The only problem I have is with the little word: rationally. What does rationally mean to you. According to the context of your article:

Rationally – acting in a self-destructive manner that triggers shock waves threatening banks themselves.

I’m not so bright as to go to Yale for economics, nor even to go to an Ivy. Heck, I didn’t even finish grad school. But still, the way Mr. Patterson uses the word, rationally, that’s the opposite of what I thought it was. I’d search and replace rationally with the word suicidally.

But the article gets better. “The trick is for policy makers to break the loop.” So banks are so stupid that they “trigger shock waves that threaten themselves” that they need a big nanny government to take care of them. Poor little idiot bankers. Shouldn’t they do something like hire some smart people, maybe from Yale economics to figure out what rationally really means? Or do we need congress to investigate this?

This is the same paper that stands against every social program, the one who does not wish to help citizens who can’t decider something like a sub-prime mortgage agreement. No, people with grade school educations can be trusted to figure out all legalese on their own. All citizens can be trusted to act rationally. Or is it suicidal?

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