Financial mania: why bankers and politicians failed to heed the warning signs of the 2008 credit crisis

Posted by pt91 at Jun 07, 2012 09:40 AM |
Award-winning University of Leicester academic identifies ‘manic behaviour’ in the financial world

Issued by University of Leicester Press Office on 7 June 2012

Western economies displayed the same kind of manic behaviour as psychologically disturbed individuals in the run up to the 2008 credit crisis -- and it could happen again, according to a new study.

Bankers, economists and politicians shared a “manic culture” of denial, omnipotence and triumphalism as they threw caution to the wind, says Professor Mark Stein, the award-winning academic from the University of Leicester School of Management.

Observing - but not heeding - the warning signs from the collapse of the Japanese economy in 1991 and the 1998 crisis in south-east Asia, the financial world in the West went into an over-drive of denial, escalating its risky and dangerous lending and insurance practices in a manic response, he says.

Professor Stein, who has today (June 7) been awarded the iLab prize for innovative scholarship, identifies and describes this manic behaviour in the 20-year run up to the credit crisis in a paper published in the Sage journal Organization.

The causes of the banking collapse that plunged the UK and many other countries into recession have been well documented but an important question remains:  Why did economists, financiers and politicians fail to anticipate it?

Professor Stein argues that the financial world was suffering from collective mania in the two decades running up to the events. “Unless the manic nature of the response in the run up to 2008 is recognised, the same economic disaster could happen again,” he warns.

He defines the manic culture in terms of the four characteristics of denial, omnipotence, triumphalism and over-activity.  “A series of major ruptures in capitalist economies were observed and noted by those in positions of economic and political leadership in Western societies.  These ruptures caused considerable anxiety among these leaders, but rather than heeding the lessons, they responded by manic, omnipotent and triumphant attempts to prove the superiority of their economies.”

The massive increase in credit derivative deals, industrializing credit default swaps and the removal of regulatory safety checks, such as the repeal in the United States of the landmark Glass-Steagall banking controls were a manic response to the financial crises within capitalism,” he says.

Professor Stein’s award-winning research paper - A culture of mania: a psychoanalytic view of the incubation of the 2008 credit crisis – says this behaviour was also strengthened by “triumphant” feelings in the West over the collapse of communism.

“Witnessing the collapse of communism, those in power in the West developed the deluded idea that capitalist economies would do best if they eschew any resemblance to those communist economies, thereby justifying unfettered financial liberalization and the destruction of the regulatory apparatuses of capitalism. The consequences of this manic response have been catastrophic, with the on-going eurozone crisis being - in many ways - a result of this,” he says.

“Whether one examines the actions of banks and hedge funds, or the limitations of ratings agencies, auditors, regulators and governments, a more worrying and deeper question emerges concerning why so many parties, more or less simultaneously, were implicated in such unprecedented and extreme risk-taking.”

For more details, please contact:

Ather Mirza

Press Office

Division of Corporate Affairs and Planning

University of Leicester

tel: 0116 252 3335

email: pressoffice@le.ac.uk

Notes to editors

The iLab prize for innovative scholarship is jointly sponsored by the European Academy of Management (EURAM) and the Swiss-based Imagination Laboratory Foundation.  The award - a diploma and 12,000 Swiss Francs - was made at the EURAM Annual Conference in Rotterdam, Holland, on June 7.

Professor Mark Stein was awarded the prize for his work using psychoanalytic ideas in relation to organisations and, in particular, for his paper “A Culture of Mania: A Psychoanalytic View of the Incubation of the 2008 Credit Crisis”.

The full paper can be found here: http://org.sagepub.com/content/18/2/173.full.pdf+html

The judges said: “Stein’s work on the mania surrounding the 2008 financial crisis exemplifies the award criteria - bridging theoretical boundaries to develop an innovative approach to a problem that has considerable economic and social impact.”

Professor Stein has a First Class BA Honours degree from the University of Warwick; an MSc (Econ) from the London School of Economics; an MPhil from the University of Cambridge; and a PhD from Brunel University. He has also studied psychoanalytic theory and method for many years at the Tavistock Clinic.

He has been a Senior Lecturer at Imperial College London, a Research Fellow at the London School of Economics and Brunel University, and a Researcher and Consultant at the Tavistock Institute. He is currently writing a book on the origins of the eurozone crisis.

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