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Thursday, January 29, 2009

Ancient Greece Knew What Greenspan Didn't


History never dies. It is reborn every minute of every day.

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Hugh Graham, January, 2009.

Somewhere out there lurks a set of rules darker and more draconian than any written in a legal code or any of the laws that Wall Street regulators failed to consider as the world economy began its landslide. It’s not the law of supply and demand or the marketplace law of Adam Smith. It is, however, close to the law that looms as the polar ice caps melt and parts of the planet are reduced to flood or drought. Nor is it dissimilar to the Higher Power of twelve-step programs for recovering addicts.

It is, pure and simply, the Law of Nature, the one which, since we’ve been on earth, we’ve tried to bend, stretch and break, always to our regret. The most recent example has been the spectacular over-reaching on Wall Street. Human (as opposed to eternal) nature being what it is, we keep on daring and testing that law and we find out, sooner or later that not only is it a law of natural forces, it’s a Law of Existence and you can’t get around it. The ancient Greeks called our urge to break it ‘Hubris’, a word often associated with the late Bush administration and its ambitious, Promethean foreign and economic policies. (Prometheus was chained to a rock to be eaten by vultures for trying to steal fire from the gods).

The Greeks were the first to observe those governing principles not just in myth, but in nature. The ‘natural philosophers’ were those who detected the laws of nature operating in man as well. These thinkers found wisdom before Socrates used abstract reasoning to produce a purely human idea of the Good, so they’re called the Presocratics. They flourished between about 700 BC and 400 BC.

Universal observations about excess first came from Anaximander. When heat and cold, wet and dry exceed their limits, he observed, they’re moderated by one another according to a principle of time which he called “justice;” he wrote: “...the things from which existing things come into being are also the things into which they are destroyed, in accordance with what must be. For they give justice and reparation to one another for their injustice in accordance with the arrangement of time.” Heraclitus, a successor to Anaximander and the best known of the Presocratics, referred to nature directly: “Moderation is the greatest virtue, and wisdom is to speak the truth and to act according to nature, paying heed.” He also observed that it’s best to stop the excesses sooner rather than later: “One should quench arrogance rather than a conflagration.” Of course quenching a conflagration is precisely what President Obama is faced with over the coming year.

Arrogance in the face of nature passed the point of no return when Wall Street bankers and fund managers turned to increasing capital at the expense of protecting it. A new array of “financial products” like derivatives and sub-prime mortgages presented opportunities to play for high stakes against long odds, leading them to gamble away their clients’ money. As Heraclitus said, “It is hard to fight against impulse; whatever it wishes, it buys at the expense of the soul.” Democritus suggested that you can dig yourself in so far that you can’t get out: “The man completely enslaved to wealth cannot be honest.” And the gargantuan salaries and bonuses also recall his words: “The passion for wealth, unless limited by satisfaction, is far more painful than extreme poverty; for greater passions created greater needs.”

In the ether of Wall Street, it was all too easy to think of money as an abstraction, separate from those who need it to live. But nothing is separate. The very first natural philosopher, Thales, may have been na├»ve to think that the fundamental substance of all things is water, but he was on the right track- everything is connected. Of Thales, Aristotle remarked, “Some say that ‘soul’ is mixed in the whole universe. Perhaps that is why Thales thought that everything was full of gods.” The bankers who gambled with derivatives and sub-prime mortgages were not gambling with money- they were gambling with their investors’ savings, with pension funds and the mutual funds of ordinary people. They were gambling with people’s lives.

Thales’ theory about water did have profound truth, if only by analogy. Where water meets man, it has to be regulated. It cannot, as Alan Greenspan suggested about America’s big financial institutions, be self-regulating. The metaphor of the federal reserve Chairman controlling the money flow by turning the tap is no accident. Wall Street’s regulator of financial practices, the Securities and Exchange Commission, had the same duty. Greenspan’s and the SEC’s deliberate laxity allowed financial institutions to “flood” with debt and the debt moved very much like water, sinking institution after institution and eventually leaking into one country after another.

Greenspan’s extreme economic liberalism had the effect of defying the “higher power” of moderation or Anaximander’s “justice” by encouraging self-regulation. The fad had soon embraced the SEC as well, calling to mind Heraclitus’s maxim, “But though the Law is universal, the majority live as if they had understanding peculiar to themselves.” There was a time when regulation worked. Paul Volcker, the Federal Reserve Chairman under President Carter, kept in place a system of regulation that would have produced a less spectacular economy than the one brought about after President Reagan removed him, but an economy that would have been, in the long run, better for everybody. The tension between regulators and business is, in the end, productive. Heraclitus again: “That which is in opposition is in concert, and from things that differ comes the most beautiful harmony.” Putting it another way, he said, “...that which differs with itself is in agreement: harmony consists of opposing tension, like that of the bow and the lyre.” In the United States, where the law is often treated as an obstacle rather than a safeguard, Americans might observe another thought from the same philosopher: “The people should fight for the Law as if for their city-wall.”

Those who criticized Washington for attempting to correct the broken business cycle with huge bailouts for poorly run enterprises, could have quoted Pythagoras: “Don’t help a man off with a load but help him on.” In the end, you can’t beat the business cycle by producing permanent wealth any more than you can beat nature. Economics, like agriculture after all, is a science of management, not the search for perfection. In the words of Xenophanes, “ for certain truth, no man has seen it, nor will there ever be a man who knows about the gods.” If things can be allowed to take their course, Anaximander reassures us, “what comes into being must have an end and there is an end to every destruction.” For Heraclitus, the waxing and waning of days and seasons provides a good model: the universe is “everliving Fire, kindled in measure and quenched in measure.” He reassures us that even “the sun will not transgress his measures; otherwise the furies, ministers of Justice will find him out.” If the sun cannot escape the furies, how, indeed, could Wall Street?
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