Emotions in Finance: Distrust and Uncertainty in Global Markets

by Jocelyn Pixley
ISBN: 0521535085

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A Review of: Emotions in Finance:Distrust and Uncertainty in Global Markets
by Christopher Ondaatje

Jocelyn Pixley's slender volume Emotions in Finance states in its opening paragraph that "money is based on a trust," and she goes on to say that trust "is inherently problematic." She then issues a warning that the world's money is less secure than we like to think.
Pixley, a Senior Lecturer in the School of Sociology and Anthropology in the University of New South Wales, Australia, argues that money is not tangible but a promise based on rarely-examined premises: "Since the idea of money as a promise' is counterintuitive, going against the every day experience of its tangibility in our hands and wallets, most critics neglect the implied promise that money entails and so leave unexamined the trust on which it rests." And that promise is, primarily, government debt.
In the era of Bretton Woods (1944), gold standards, fixed currency interconvertibility, and the Glass-Steagall Act (which separated commercial and investment banking in America) money was sounder than today, but in 1971 President Nixon floated the dollar, in 1975 competitive regulations replaced control-type restrictive practices on the New York Stork Exchange, in 1986 London followed with the Big Bang, and in 1998 Glass-Steagall was rescinded. Since then the risk inherent to all money trades has increased, and concomitantly " distrust and sometimes fear inspires all financial action," as well as inspiring the title of this book.
With seven trillion dollars in the world today (most of which exist electronically), and with capital markets so erratic and herd-like, the basis of the world's money is unclear. Pixley complains, however, that instead of the caution that is proper to such a situation, our era is driven by a utopian assumption that we will all continue to get richer and that we can increasingly de-risk the future. Although she does not quote him, she suggests that such a panglossian vision is not too different from Irving Fisher's in 1929 when he said that "stocks seem to have reached a permanently high plateau." Pixley correctly fears another meltdown as market players increasingly lose their trust in American monetary policies.
Even worse, Pixley worries that the instruments the market has generated to increase trust have themselves been counterproductive. So, for example, share options were introduced to align the interests of managers with shareholders, but they have simply introduced recklessness. That is because managers need not take up their options, but they can be rewarded with big pay-offs if they fail, so they are encouraged into absurd risk-taking because they personally gain most if their companies either succeed or fail spectacularly. It could also be argued that the modern trend to empower non-executive directors (which is based on the mistrust of the executive directors) simply empowers non-experts to take decisions in fields of which they are ignorant.
The word credit derives from the Latin credito, to trust, and in this book Pixley interviews a host of authoritative bankers and other financial players in the United States, UK and Australia to determine how we reached our current but dangerous position. But there is a gap in this book. Nowhere is it made very clear what Pixley's prescriptions for a safer future are. So, for example, she laments the passing of an era when a trader's word was his bond because he knew everybody with whom he traded, but she does not argue that the days of impersonal trust should now be reversed. She laments the loss of regulations, but new regulations such as Sarbanes-Oxley have now actually been introduced, although in my opinion they do not go far enough. She does not comment on this, and indeed Sarbanes-Oxley does not appear in the Index and does not appear to be mentioned in the text. Further, if the core problem at the heart of the financial nexus is inappropriate government debt, then that problem needs quantifying.
But perhaps that criticism is not fully just. Pixley works in a department of sociology and anthropology, so she can be forgiven for simply chronicling, through her interviews, the succession of stratagems markets generate as they search, fruitlessly, to reduce risk and foster trust in an inherently risky and dubious world. As a chronicle of shared financial anxieties, written as an observer from an alien world, this is an excellent book. For a solution, we will need to look to other writers.

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