December 5, 2008--The Big Casino
Let me call him Gabriel. He is an investment banker of some stature and deservedly highly regard among colleagues and clients. Impeccable and unflappable in every way--in manner (elegant), in dress (bespoke), and especially in the soundness of his advice (widely sought) and reputation (none more esteemed). Thus, no one, even those close to him, would ever think of him much less call him “Gabe.”
But I found him decidedly different the other evening when he and I met for drinks and dinner. His tie was less than pulled firmly beneath his collar; and, since I had never seen that before, I knew something more than his haberdashery was awry.
“Is everything all right?” I finally found a way to ask, averting eye contact, after we had had two cocktails and exchanged chitchat. The nature of our relationship is such that neither of us would have ever thought to speak so personally, even if we had been inclined to do so.
He surprised me by the immediacy and intensity of his response. “In truth not.” He paused as if to test if he wanted to go further. “You know that I have been a banker for nearly forty years and that I have clients here and in Europe who have sought my council. I suspect that you also know that they and I have done very well. Yes, there have been setbacks. Times when markets have gyrated. But we, I should in full honesty also say I, expected that. There are normal, natural business cycles, some more predictable than others; some that take considerable thought to understand.”
I sensed of course where this was headed. I had been wondering how he had been faring during this current economic crisis. I also knew, without knowing any of the details, that no matter how hard he might personally have been hit, that he would be fine. In fact, very, very fine. But I also knew, or suspected . . .
He interrupted my thoughts, “I have been reading William Bernstein’s fascinating new book, A Splendid Exchange, a history of world trade from the Sumerian period through the current era of globalization. His point, of course, is that commerce of this kind is almost as old as civilization itself and that the world has been a version of flat long before it was perceived to be such by Tom Friedman.
“But that larger picture, though interesting and important to understand, is not what has affected my very recent thinking. Of course I know a great deal about the history and theory of money. From both an economic and anthropological perspective. And how without money, if tethered to the barter system, there could be no trade as we have come to know it. I have studied both fields carefully. So this we know very well.”
“So what is it, then, Gabriel? I don’t think I’m following you.”
“It’s something Bernstein wrote that has been troubling me, almost a throwaway, about the introduction of money as an exchange medium.”
“And what is that?” I ordered a third drink for the both of us.
“Until about 4,000 years ago, in the first commercial exchanges, to trade say cows for chickens, it would be necessary to calculate how many chickens were needed to be offered for one cow—would it be fifty or fifty-five. And if in a barter system where there are ten different items under consideration there are fully forty-five possible combinations of exchange pairs. Very cumbersome, very complicated, and almost impossible to quantify much less keep consistent when attempting to assign value to each of these pairs.
“Thus the revolution that money in the form of silver coins made available. With coinage, which quickly spread throughout the then-known world, for those ten items it was necessary to assign only ten values, rather than forty-five. This made possible large-scale transactions on a geographically broad scale.”
I was happy when the Scotches arrived. “I do know a bit about this,” I said. “But am not understanding why something this fundamental has so upset you.”
“It is because, in this current environment, I have been thinking again about why this trading system in fact works.”
“This I am eager to hear.”
“What, after all is so intrinsically valuable about silver? Or, for that matter, gold?”
“It’s rarity?”
“Well, yes, of course, things more widely available and perishable would not serve at all as exchange mediums. Grains for example, which would obviously deteriorate, or iron coins, which would oxidize. So silver and gold fit the bill quite well.”
“And? What’s the problem?”
“Some time later most of the world moved off the silver and gold standard as the way to back their currencies. Thinking, I suppose, that paper money, backed by the good will and faith in the viability of the economy of the county issuing it would provide sufficient security to those engaged in trade and other forms of commerce to use and trust it as a more portable vehicle for exchange. Now, we have even moved to the point where to participate in a transaction it is not longer necessary to transport the more transportable paper currency to complete the deal. An electronic blip via the Internet is all that is required to pay for the transaction. And then of course we invented credit to fully lubricate economic exchange.”
“To tell you the truth, Gabriel, this is nothing new to me and of course very old hat to you. So, again, I still do not . . .”
“Let me then get to the point.” I was pleased to hear that. It was getting later than when I was comfortable beginning dinner. “All of this, including when we either exchanged precious-metal coins or backed our currency with silver and gold, all of this is based on an agreed upon set of beliefs and fictions.
“There is nothing inherently valuable much less useful when it comes to silver and gold. For jewelry making of course, it is valuable, and also to some extent gold in dentistry. But why would having a basement full of gold ingots make anyone feel more secure than having a vault full of paper currency —and some of my clients are doing just this: buying literal gold ingots or stashing cash in a version of under their mattresses.
“The reason any of this works is because we agree to make it work. We believe in its value. We trust in its universal consistency. Not because, again, there is anything intrinsic or real about very much of this.”
“I can see why you must be having difficulty sleeping.” I was clinging to the last of my drink. “So, what do you think will happen? Perhaps more important, what should we be doing?”
“For forty years I have been making my way in the world, successfully, by knowing the answers to these kinds of questions. Now, I am not at all sure. I am taking this personally. Though thankfully, yes I have been affected, I am still very fortunate. I am very comfortable unless there is a full cataclysm, which I do not think will occur—there is too much that is sound about the major economies and we have in place mechanisms, imperfect ones to be sure, but mechanisms that are well-enough designed to prevent a full meltdown.”
“Why then personally?”
“Because my faith, and that’s what it has been—faith--has been shaken as to the rationality of markets. I do understand the role of emotion in economic behavior. Some are calling it now behavioral economics, where economists study and explain the role of individual and group psychology in making decisions about major purchases such as homes. There was a recent column in the New York Times about this. Not bad. I recommend it.
“And, further, there have been economic manias and panics through the centuries. I remember one time you asked me about the 17th century Dutch tulip mania. Where certain tulip bulbs became so expensive that they soared in value to the equivalent of twenty times what a skilled craftsman could earn in a year. And then how it all collapsed. So we know about economic bubbles. But here I had thought that we had learned from such things, including our own bubbles. Like the Dot-Com bubble, which burst just eight years ago.”
He drained his glass. “Yet here we are again. I think even more perilously perched. And I am, yes, shaken because I have all along thought more reason prevailed than appears to be the case even in markets where for millennia, including today, things such as belief and trust and even faith were and are critical and necessary components. But I am not at all comfortable when so much, such a disproportionate portion, is so emotionally driven.”
“Well I,” I stammered.
“But we will be fine.” He popped up off the bar stool and was his old self again. He slapped my on the back and even remembered to adjust his tie. “Time to eat,” he said with his familiar exuberance, “They tell me they have white truffles. We must have some of those.”
The New York Times article Gabriel referred to is linked below.
But I found him decidedly different the other evening when he and I met for drinks and dinner. His tie was less than pulled firmly beneath his collar; and, since I had never seen that before, I knew something more than his haberdashery was awry.
“Is everything all right?” I finally found a way to ask, averting eye contact, after we had had two cocktails and exchanged chitchat. The nature of our relationship is such that neither of us would have ever thought to speak so personally, even if we had been inclined to do so.
He surprised me by the immediacy and intensity of his response. “In truth not.” He paused as if to test if he wanted to go further. “You know that I have been a banker for nearly forty years and that I have clients here and in Europe who have sought my council. I suspect that you also know that they and I have done very well. Yes, there have been setbacks. Times when markets have gyrated. But we, I should in full honesty also say I, expected that. There are normal, natural business cycles, some more predictable than others; some that take considerable thought to understand.”
I sensed of course where this was headed. I had been wondering how he had been faring during this current economic crisis. I also knew, without knowing any of the details, that no matter how hard he might personally have been hit, that he would be fine. In fact, very, very fine. But I also knew, or suspected . . .
He interrupted my thoughts, “I have been reading William Bernstein’s fascinating new book, A Splendid Exchange, a history of world trade from the Sumerian period through the current era of globalization. His point, of course, is that commerce of this kind is almost as old as civilization itself and that the world has been a version of flat long before it was perceived to be such by Tom Friedman.
“But that larger picture, though interesting and important to understand, is not what has affected my very recent thinking. Of course I know a great deal about the history and theory of money. From both an economic and anthropological perspective. And how without money, if tethered to the barter system, there could be no trade as we have come to know it. I have studied both fields carefully. So this we know very well.”
“So what is it, then, Gabriel? I don’t think I’m following you.”
“It’s something Bernstein wrote that has been troubling me, almost a throwaway, about the introduction of money as an exchange medium.”
“And what is that?” I ordered a third drink for the both of us.
“Until about 4,000 years ago, in the first commercial exchanges, to trade say cows for chickens, it would be necessary to calculate how many chickens were needed to be offered for one cow—would it be fifty or fifty-five. And if in a barter system where there are ten different items under consideration there are fully forty-five possible combinations of exchange pairs. Very cumbersome, very complicated, and almost impossible to quantify much less keep consistent when attempting to assign value to each of these pairs.
“Thus the revolution that money in the form of silver coins made available. With coinage, which quickly spread throughout the then-known world, for those ten items it was necessary to assign only ten values, rather than forty-five. This made possible large-scale transactions on a geographically broad scale.”
I was happy when the Scotches arrived. “I do know a bit about this,” I said. “But am not understanding why something this fundamental has so upset you.”
“It is because, in this current environment, I have been thinking again about why this trading system in fact works.”
“This I am eager to hear.”
“What, after all is so intrinsically valuable about silver? Or, for that matter, gold?”
“It’s rarity?”
“Well, yes, of course, things more widely available and perishable would not serve at all as exchange mediums. Grains for example, which would obviously deteriorate, or iron coins, which would oxidize. So silver and gold fit the bill quite well.”
“And? What’s the problem?”
“Some time later most of the world moved off the silver and gold standard as the way to back their currencies. Thinking, I suppose, that paper money, backed by the good will and faith in the viability of the economy of the county issuing it would provide sufficient security to those engaged in trade and other forms of commerce to use and trust it as a more portable vehicle for exchange. Now, we have even moved to the point where to participate in a transaction it is not longer necessary to transport the more transportable paper currency to complete the deal. An electronic blip via the Internet is all that is required to pay for the transaction. And then of course we invented credit to fully lubricate economic exchange.”
“To tell you the truth, Gabriel, this is nothing new to me and of course very old hat to you. So, again, I still do not . . .”
“Let me then get to the point.” I was pleased to hear that. It was getting later than when I was comfortable beginning dinner. “All of this, including when we either exchanged precious-metal coins or backed our currency with silver and gold, all of this is based on an agreed upon set of beliefs and fictions.
“There is nothing inherently valuable much less useful when it comes to silver and gold. For jewelry making of course, it is valuable, and also to some extent gold in dentistry. But why would having a basement full of gold ingots make anyone feel more secure than having a vault full of paper currency —and some of my clients are doing just this: buying literal gold ingots or stashing cash in a version of under their mattresses.
“The reason any of this works is because we agree to make it work. We believe in its value. We trust in its universal consistency. Not because, again, there is anything intrinsic or real about very much of this.”
“I can see why you must be having difficulty sleeping.” I was clinging to the last of my drink. “So, what do you think will happen? Perhaps more important, what should we be doing?”
“For forty years I have been making my way in the world, successfully, by knowing the answers to these kinds of questions. Now, I am not at all sure. I am taking this personally. Though thankfully, yes I have been affected, I am still very fortunate. I am very comfortable unless there is a full cataclysm, which I do not think will occur—there is too much that is sound about the major economies and we have in place mechanisms, imperfect ones to be sure, but mechanisms that are well-enough designed to prevent a full meltdown.”
“Why then personally?”
“Because my faith, and that’s what it has been—faith--has been shaken as to the rationality of markets. I do understand the role of emotion in economic behavior. Some are calling it now behavioral economics, where economists study and explain the role of individual and group psychology in making decisions about major purchases such as homes. There was a recent column in the New York Times about this. Not bad. I recommend it.
“And, further, there have been economic manias and panics through the centuries. I remember one time you asked me about the 17th century Dutch tulip mania. Where certain tulip bulbs became so expensive that they soared in value to the equivalent of twenty times what a skilled craftsman could earn in a year. And then how it all collapsed. So we know about economic bubbles. But here I had thought that we had learned from such things, including our own bubbles. Like the Dot-Com bubble, which burst just eight years ago.”
He drained his glass. “Yet here we are again. I think even more perilously perched. And I am, yes, shaken because I have all along thought more reason prevailed than appears to be the case even in markets where for millennia, including today, things such as belief and trust and even faith were and are critical and necessary components. But I am not at all comfortable when so much, such a disproportionate portion, is so emotionally driven.”
“Well I,” I stammered.
“But we will be fine.” He popped up off the bar stool and was his old self again. He slapped my on the back and even remembered to adjust his tie. “Time to eat,” he said with his familiar exuberance, “They tell me they have white truffles. We must have some of those.”
The New York Times article Gabriel referred to is linked below.
posted by Steven Zwerling at
6:20 AM
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home