Psychology in the city

Growing pains.

In these times of global financial crisis and banking scandals, some understanding and solutions may come from the science previously frowned upon: psychology.

Since 2008 the financial world and banks in particular have been in crisis. The reaction in the public has been fierce, angry and accusing. Bankers are now shamelessly being called all sorts of names, even in the quality press. The man in the street feels dissociated with people in banking as they perceive them. That uncomfortable feeling of dissociation is a normal coping strategy where understanding fails. “These people aren’t like us,” most seem to feel. A lot of people are now looking at psychology to help them understand.

The question of what was going on and what the people in banking are like is a very valid one, but one that will take a long time to answer. The answer will evolve with time and perspective. Right now, arrows are pointing at a few individuals: the big bosses with big bonuses. They came under scrutiny in the first round of this on-going crisis and it seems that many didn’t understand the prevailing mood building up against them. That led to speculations of many of them being psychopaths. There is in fact quite a bit of scientific research to support that thesis. Several scientists have found similarities in personality traits between psychopaths in hospitals and prisons and top executives. Some personality disorders were found to be even more common in managers than in criminally or psychiatrically monitored psychopaths: histrionic PD (using superficial charm, being insincere, egocentric and manipulative), narcissism and compulsive PD (being perfectionist, rigid, stubborn and dictatorial). That makes nice headlines and always draws in lots of comments, but it is worth looking into it deeper. The scientist Hare has developed a questionnaire for measuring psypathology and found 1 per cent of the average population to show psychopathic tendencies. In executives it was 4 per cent. He presumes it might be a lot more in the financial world, but he has no data to back that up. He made a guess of 10 per cent.

It makes you wonder if only 4 to 10 per cent of a population can make such a difference. They can, with a majority of people being of a more neurotic disposition and therefore enjoying being shown the way. We have few leaders; but leaders have many followers. It is just how it is; it has always worked like that. Outspoken leaders, decision makers, trendsetters, psychopaths: they show a doubting crowd how things should be done and they have an impact. In a corporate world they set the tone for culture and competition. If 20 colleagues fight for one promotion, and one of the colleagues gets the knifes out, the others are likely to follow. However, having worked as a coach and employee wellbeing professional for nearly two decades it is my observation that such corporate culture is still strongly dictated from above. The knife-fighters make promotions more easily; the corporate arena has been moulded around ruthless fighting. The competition between companies was and is a hard-fought and ruthless one; that favours ruthless personalities inside the company.

Top-bankers have been called all possible insults, but we do need to take a step back. This hard-paced competitive world of banking did manage to get the absolute most out of people. With their locomotive pulling power they did manage to keep economies thriving. Progress and developments have been made in the financial world. Moreover, it is not unusual to find surprising and frightening character traits in groups of perfectly integrated and non-criminal people. Typically surgeons and butchers could find in their jobs outlets for a deeper rooted aggression. Extreme personality traits can therefore be applied perfectly functional and acceptable. In psychology we call it sublimation. No one less than Friedrich Nietzsche came up with the term first; Freud and Jung developed the concept further.

Our financial world is certainly driven by success. It feels however like things have gone too far and that shouldn’t surprise. Success breeds the desire for more success. Neuroscience teaches us how success heightens the release of testosterone in brain, which in turn hightens the release of dopamine. Dopamine triggers the reward centre in the brain. No wonder they now call it casino banking: people on a winning streak in the casino turn into strange creatures as well, just like some of your relatives do when playing certain board games. In the past I have raised the argument for having both a reward and punishment system for our top executives. One does not work without the other, major psychologists like Pavlov and Skinner teach us. It seems there are too many rewards for the top guys, and not enough punishments foreseen in their contracts. A reward-only system will breed greed, and I believe that is exactly what people perceive in bankers right now.

In the very competitive lower echelons of financial institutions and certainly on the trading floor, employees are approved of on the basis of how much money they bring in rather than how they behave. Such lack of control invites border-crossing behaviours. People are a lot more likely to do the wrong thing or eat the sugary bun when they think or know nobody is watching. And when they are ordered to hurt others, many are likely to obey that order, we know from the very famous Milgram experiments. We now know that orders were giving by executives operating in a psychopath-dominated environment. The ones that got hurt, I guess, are the customers and even whole national economies. I feel absence of supervision works a silent approval of behaviours that are potentially damaging to others.

Companies are money-making machines; talent is their fuel. They have learned over the years to use the ultimate strategies to get the talent in and to get most out of talents. Up until recently they gambled massively on satisfaction. It was a game of seduction, lust and gratification. The carrot on the stick was the Ferrari-and-champagne-lifestyle, the ultimate almost mystical goal the boardroom. Since the crisis, I see in more and more companies how that strategy has made way for one of fear. Many people have been sacked and anyone can be the next one at any time. As such, our companies play on what Freud found to be the two main drives of humans: libido and fear of death, Eros and Thanatos. Cunningly they play on insecurities and family-relationships as they lure highly talented people at the end of university time and offering them a chance to show mum and dad they can stand on their own two feet. Parents are constantly worried about how their kids will survive after they are gone; they are seeking proof that their kids will be all right. Our big financial centres offer that. That the reality for these young people often turns out quite differently is a message that can difficulty be disclosed to anyone, let alone the home-front.

No crisis is endless, and we will get out of this complicated cluster of crises too. And as with every crisis, we will come out damaged but stronger, better, smarter and more mature. We will not have a revolution; I don’t feel we are ready for that nor need that. Revolutions are too often sign of immaturity. Through all the criticism the British and global financial world have been bestowed upon The City in the past few weeks, it is all too easy to lose track of the fact that the financial heart of London has been a trendsetter in corporate culture for decades. Through the avalanche of criticism, that is made to sound like a bad thing. It isn’t. Through the competition driven evolutions of the past decades, also technical ones, we have developed a banking sector that has been propelled forward in complexity but also ability. Our financial sector and corporate world are now advanced and outstanding; it will take us some time to learn to manage and control it efficiently. The desire to just get rid of the existing system is a kneejerk reaction, a flight reaction. We are going to make do with the one economic system we’ve got and the millions of bright, talented and righteous people working in it. We will have to learn and live with it, even though right now many of us have lost sight of how excellent it all is. It is through the basic psychological drives upon which our economy has played so cunningly that a more mature personality develops. It is probably that more mature personality our corporate world is searching for now.

Our professional sectors will come out changed; I feel it will all be less extreme, a bit more boring. There will be more morals and less champagne, more mainstream and less party. The economy is a long winding road. Going too fast, we seem to have run off the road –again. On a very bendy road, even with a Ferrari, it is better to slow down and stay in the middle of the road as much as you can. It takes you to through the curves and to your destination much faster and much safer.  As with all evolving sectors in our day and age, the economy will find inspiration for growth in non-economic fields like philosophy, psychology, mathematics, physics, biology, electronics provided they accept those sciences for what they are. As a psychologist, I feel the corporate world has not always wanted to understand and correctly implemented my beloved science. They seem sometimes to have opportunistically tamed psychology and created a processed version, foregoing many potential benefits of such rich and innovative science. Incorporating insights from non-economic fields in an open and accepting way will reconnect the financial and hard corporate world with a wider socio-economic and global reality, sense of which appeared to have been lost.

The fact that the pimple burst so publicly in London could prove to be the best news for London in the end. It may not look good right now, but London will hopefully see itself forced to become the most ethical and trustworthy financial centre in the world. The others will be lagging behind. If London gets this exercise right, it will remain the most important financial centre in the world for decades to come. But the exercise might hurt a lot: growing pains.

City workers in london. Photograph: Getty Images.

Peter Sioen is a career & management coach and psychologist working for Mvantage Ltd in London; and international TV, radio & news media commentator with a self-coaching book in preparation. Blogging on http://petersioen.tumblr.com/

Getty
Show Hide image

We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?