The bankers who trashed the global economy enjoyed the sensation of losing hundreds of billions of pounds and plunging the world into recession, says a Cardiff University academic – and not just because they knew they’d be picking up fat bonuses just a couple of years later.
Dr Paul Crosthwaite claims that the only explanation for banks’ willingness to deal in sub-prime loans and related derivatives, which were bound to result in disastrous losses, is that the bankers unconsciously desired the destruction of their own institutions. Such catastrophic losses, Dr Crosthwaite argues, can give masochistic pleasure.
Crosthwaite argues that financial crises, such as the ‘Black Monday’ crash of 19 October 1987, the bursting of the dot-com bubble and the credit crunch are the result of the innate urge for self-destruction which Sigmund Freud called the ‘death drive’.
The financial crash, he reckons, is in a way equivalent to the traditional Native American ‘potlatch’ ceremony,in which the chiefs of rival tribes competed to destroy their own possessions. As with chiefs participating in a potlatch, huge losses are an expression of power, prestige, and importance, he says.
“Economists and financial policymakers must recognize that investor psychology is far more complex than their models have allowed up tonow,” Crosthwaite warns. “They need to take much greater account of psychological factors such as emotion and desire, which affect how market actors behave in profound ways.”
Dr Crosthwaite believes his research strengthens the case for tighter restrictions on the risks assumed by financial institutions.
“To avoid a repeat of the ‘great recession’, it’s vital that policymakers and regulators limit the capacity of financial professionals to engage in excessive practices by curbing the disproportionate levels of risk that we’ve seen in the financial sector in recent years,” he said.