Tuesday, 29 April 2008

Mental Health and Financial Market Cycles

About 30 years ago, having just trained as an economist, I became mentally unwell and a psychiatrist diagnosed manic depression. As I struggled to understand manic depression independently I at first reached for ideas from economics - from trade cycle theory which is about boom and bust cycles. As the years went by I had reason to re-think this first approach to my problems. I went on to understand them using the medical model. Later I took ideas from psychotherapy and psycho-social explanations. Later still, employed as a development worker in the mental health voluntary sector, I developed my own ideas about mental health. Eventually I was fortunate enough to publish in respected academic journals, and to lecture. With a stable job and income, with a complete rethink about my relationship to life and society, I stopped taking the medication and stopped seeing a psychiatrist. Now, like some Rip Van Winkle character after 30 years sleep I have returned to being an economist - an ecological economist - and spend a lot of time reviewing and trying to understand the operation of the financial and other markets in their current crisis.

And I have come round full circle. Although I don't think economics has much to offer in explaining manic depression I suspect that an understanding of the sorts of psycho-dynamics that underlie manic depression may have a lot to offer in the understanding of financial and other economic cycles. The euphoria, over-optimism and frantic hyper activity of the boom is not some different kind of emotion from the emotion felt by a manic person. The panic and fear at the time of a market crash is not a different emotion from the panic, the fear and the stress -induced aggression felt by a person whose life is spiralling out of control, who cannot make sense of what is happening and resorts to fantasies and goes crazy. Finally, the super cautious way of operating of business people who have, or have come close to, going bust is not a very different emotion from that of someone who is clinically depressed.

The parallels are actually very striking. One problem here is that just as medical psychiatrists tend to de-personalise manic depression and take the explanation away of anything that resembles the impacts of the effects of everyday life, so economists tend to de-personalise their economic explanations in the language of market entities: prices, interest rates, capital ratios. In the process the human actors in these dramas, their judgements and the emotional responses which shape their judgements, somehow cease to be a part of the explanation.

As a former mental health worker I find this very strange. Well being in the mental health field has something to do with emotions at the core of the quality of life. Yet economists claim to be practising "a science" that has important things to say about how resources are allocated in the interests of human well being and welfare, and yet only peripherally refer to emotions at all. Most of economics is about modelling variables, and although there appears to be some sense that market 'sentiment' is important, the analysis of this seems to be quite shallow. As a former worker in the mental health field it seems to me that to understand the market one needs to understand the emotional dynamics of market cycles as a core part of the process and in some depth.

When we look at the financial markets from an emotional and mental health angle we immediately find something very worrying. Let us take, for example, the creditor-debtor relationship and let us look at it from a mental health point of view. In fact there is a striking correlation between mental ill health and debt - on both sides - lenders as well as borrowers.

Among other things it is now well documented in academic studies that self reported anxiety increases with the ratio of credit card debt to personal income; that the onset of mortgage debt has a negative impact on mental health on males; that, of people receiving debt advice, a high proportion (62% in a UK study) reported that their debt led to stress, anxiety and depression - which they are likely to consult their doctor about; that there is a relationship between debt and post natal depression; that debt is the strongest predictor of depression; that difficulties in repaying debts are strongly connected with suicidal ideation and self harm; that debt is associated with feelings of shame, social embarrassment, a sense of personal failure, negative self identities and is implicated in isolation, social exclusion and strained relationships. (Chris Fitch, Robert Chaplin, Colin Trend, Sharon Collard, " Debt and mental health: the role of psychiatrists" Advances in Psychiatric Treatment (2007), vol. 13, 194–202 See also)

Now let is turn to look at the situation on the other side - among the people who lend money, or at least those who manage and direct the credit markets.

Mental health problems can be severe in the heat of financial competition. Drugs and alcohol are commonplace on Wall Street. A 2001 study of brokers by Florida's Nova Southeastern University found that 23% were clinically depressed, compared with 7% overall among American men.....

New York newspapers have revelled in stories over the past year of stressed-out traders reaching breaking point. One broker, Christopher Carter, has been charged with assault for throwing a hedge fund manager, complete with an exercise bike, at a wall in an upper east side gym. The hedgie's
offence? He grunted and shouted, "you go, girl!" too loudly during a spin class.

In London, a hedge fund manager, Bertrand des Pallières, made news last summer because he was so busy shorting stocks that he didn't notice for three months that his £80,000 Maserati had been towed away.

Jim Cramer, a hedge fund manager turned television stockpicker, told the New York Times that drugs tended to reinforce traders' inability to spot a looming downturn: "Prozac and all those other drugs banish the 'this is the end of the world' thoughts. Which means you are not as anxious as you should be about an obvious downside.”


While therapists report that there is currently an epidemic of psychological illnesses in the finance sector, some of the managers find the oldest of psychological strategies for coping - avoidance, denial, switching off mentally in the heat of the crisis. An example is James Cayne, chief executive office of the Bear Stearns bank. The German news magazine Der Spiegel describes Cayne's work style thus " Even in times of the greatest crisis the boss of investment bank Bear Stearns did not let himself be distracted from his hobbies. Last July, as one of his Hedge Funds broke down, the head of the board travelled undisturbed to a several day long bridge tournament in Nashville, Tennessee. While his troops fought for survival Cayne was not contactable. He had turned his mobile phone off. Its ring could have disturbed the many times American bridge champion. " (Der Spiegel,
22.03.08 article titled "Die Bank-Raeuber" - translator BD )

So even a cursory glance reveals that, from the point of view of community mental health, the credit system is highly dysfunctional. The idea of some economists that these arrangements are somehow contributing to human welfare appears to be questionable, to say the least.

Of course mental health workers meet desperately unhappy people living absurd lives all the time. Meeting people trapped in belief systems that, from the outside, seem crazy goes with the job. Normally, to be unlucky enough to qualify for a mental illness diagnosis, the apparently strange belief system that you have, and your strange way of making sense of the world must be unique to you. It will be seen as part of your inability to communicate with others. Then a psychiatrist can damn you with a variety of diagnostic labels like "thought disorder" which are said to be the symptoms of something deeper. Over the last couple of decades it has become clear that a lot of these strange thoughts are actually interpretable with a bit of effort. Psychologists, therapists and counsellors who become good at this quickly note wider patterns of emotional response patterns in society at large - the common cultural assumptions that help form collective emotional responses made by whole groups of people. In fact there is nothing new in this - Freud applied his ideas out of the consulting room in observations about the wider world and his ideas were picked up by the advertising industry. Most advertisements work to influence people by setting up emotional associations between a product and those things and situations which people commonly desire. For example, fizzy drinks with sugar in them, are advertised by association with adolescent sexuality in blue jeans.

Using what we know about group emotions it seems to me that it ought to be possible and would indeed be valuable, to integrate the knowledge of group psycho-dynamics into our understanding of the way that markets evolve, including financial markets.

For example during a boom phase, as long as asset values continue to inflate it is easy to make money using borrowed money. For the non economists reading this paper an exaggerated simple example will make the point - suppose I have £1million to invest and can borrow £99 million and buy an asset at £100 million. If the price of this asset goes up just 1% to £101million I can then sell it and, leaving aside the interest payment, I have doubled my money, from £1million to £2million. This is called leverage and the point about leverage on the way up is that it can get out of control. Betting that asset values will go up with borrowed money creates a further pressure pushing those values up even more in a self fulfilling prophecy. Such self fulfilling prophecies are common in mental health - confidence leads to success and builds confidence even more. However there are limits to this process or we are talking about mania.....

In the circumstances of a leveraged boom it is not only asset values that get pumped up but egos. Ordinary mortals who, in other circumstances would see themselves as no more or less important than everyone else, suddenly become very rich and acquire the symbols of social success. It is thus not only bank balances that swell in size when the size of bonuses are announced.

Trading rooms are fiercely competitive places and action is happening fast and furiously. In finance, just as in any other branch of life, the more one devotes one attention wholeheartedly to the matter at hand the better that one will do. The broader and deeper one's knowledge will be the more edge that one will have over everyone else. What needs to be noticed here, however, is that this has some resemblance to addictive behaviour. In an addiction everything and everyone takes second place to the addiction. The guru who understands the markets better than anyone else probably understands the other things in life rather less - and certainly gives them little priority. For such finance experts it will probably seem self evident, ultimately, that the way out of problems is to buy one's way out of them. This will not make for happy relationships.

"I was probably one of the biggest currency traders in the world, including the banks. It was very exhausting because it was already a 24 hour market. When I went to sleep I would wake up every two hours to check the market as it opened: Australia, Hong Kong, Zurich and London. It killed my marriage." (quoted in Leon Kreitzman, The 24 Hour Society, Profile Books 1999 p 26).

This way of living is akin to mania - the fact that it might be a collective process merely serves to make it interpreted in a different way but does not change its essential character. The euphoria of mania is no different from the excitement of a small child the day before its birthday, who cannot sleep because the next day will bring a pile of presents, a party and lots of attention. The manic person cannot find a way to switch their feelings off and is constantly on an adrenalin high. Often enough in these circumstances more and more commitments are taken on - and what is missing is the idea of a personal limit to one's practical and work capacities.

In the life of a person who is not wealthy these practicalities and the urgent adrenalin charged character of their relationships will eventually mean that they will come unstuck. Making more and more commitments means that one over reaches. Complications are not foreseen. Other people do not play ball with ones grandiose designs. If one does too much one doesn't have time to wash one's clothes and do the washing up. Life, practicalities, projects and relationships fall apart as one goes past ones limits.

A rich person may not have some of these complications of ordinary life which would floor a manic person. Their money can buy servants and with enough wealth sex (though not love) is no problem either. Many of the practical problems in life can be solved with money or a credit card.

Until the crash. The whole history of the market economy tells us that a crash comes eventually. Euphoria impairs judgement. The overconfidence of the rich and powerful people, because it cannot be held in check by the countervailing power of those who are not as strong economically or politically, nevertheless reaches a point beyond which it cannot go further. This has been the case throughout history, and not just for those active in finance. As I pointed out in an article for a Psychotherapy Journal:

"The ancient Greeks already knew how to describe situations like this. This was a job for the Goddess Nemesis whose role it was to maintain equilibrium on earth 'rebalancing' happiness from time to time. In fulfillment of her role, Nemesis had a tricky relationship with the goddess Tyche - who was irresponsible in handing out Luck and Fortune, indiscriminately heaping her horn of plenty, or depriving others of what they had. In particular Nemesis would wreak havoc on those favoured by Tyche if they failed to give proper dues to the gods, become too full of themselves, boasted of their abundant riches or refused to improve the lot of their fellow humans by sharing their luck" (Brian Davey "What Future?" in Journal of Critical Psychology, Counselling and Psychotherapy Vol 7 no 2 Summer 2007)

People who become too full of themselves eventually believe that they can get away with anything in the pursuit of their addiction. In all of the literature about the current financial crisis what we hear over and again is that the banks do not trust each other. This is ironic because in its original meaning the word 'credit' is from the Latin credere and means to believe and to trust. When trust breaks down we have a very specific kind of psycho-dynamic occurring between people.

A Professor of Organisational Ethics at the Cass Business School, Roger Steare, undertook integrity tests on more than 700 financial services executives in several major firms and came to the conclusion that "There is a systemic deficit in ethical values within the banking industry. This will not change by hanging a few people out to dry," says Professor Steare.

The results of these tests indicate that as a group, they score lower than average in honesty, loyalty and self-discipline, he said. He compared traders to "mercenary hired guns", who regularly switch firms to maximise earnings. http://news.bbc.co.uk/1/hi/business/7207563.stm

Behind the technical language of liquidity, a language that distances us from the deeper reality, the truth about the credit crunch is that it is a reputational collapse of the participants of an entire economic sector - the people running this sector have overreached themselves and are meeting their Nemesis.

The road that took them to this point was one where there were plenty of illusions which are really little different from the illusions that a manic person will create. Cassandras who try to express the folly of pushing beyond the limits are ignored.

In the case of the financial markets, because the manic process is a collective one, the illusions have been embodied in institutions and have been dignified with the term "financial innovations". Rather as the mad person will split off the part of their personality that does not fit their cosy self image - for example the murderously angry and hateful self - so the financial institutions have split off their financial junk that earned them fees making predatory loans to people who cannot afford to pay them back. The splitting hived these mortgage backed securities off balance sheet into special purpose institutions. Rather as the mad person will wishfully believe what they want to believe rather than hard realities, the banks paid other organisations to give AAA ratings to the worthless pieces of paper that they were issuing so that everyone including themselves could believe that everything would be OK.

Such strategies have their parallels in reality of avoiding mental mechanisms, the pathologies unravelled by clinical psychology. But then, to use the terminology of Freudian analysis, the repressed truth, the reality that has been held at bay, returns. The worthless assets have to be taken back onto the books. Reality bursts through illusion.

In the here and now there are about 10,000 city workers who are about to lose their jobs and are likely to find severe problems of re-adjustment. This is not only because they will have no way of immediately occupying their time, the fact that they will lose the regular routine that structures their day, the fact that their relationships mediated through work will be lost, the fact that they will now be parting from their source of income. The re-adjustment will be so difficult because it will not be obvious what kind of job or life they might re-adjust themselves to. There will be identity problems here of the most profound kind. Given their previous world view and mind set that celebrated winning and competitive success they are likely to see themselves as "losers". What is more many of them will find to their horror that no one in the wider society is the least bit sympathetic to their plight as there will be a widespread assumption, which one can hardly question, that the banking and finance industry has brought this down on their own heads.

These are the sorts of circumstances where the hubris is likely to be psychologically crushing and it would not surprise me in the least if quite a lot of the former "masters of the universe" find themselves in the orbit of the mental health services with severe depressions of the clinical kind. However they are unlikely to find the psychiatric wards havens from the cruel world - for it is likely that on the same wards will be the borrower victims of the credit crunch too. In these circumstances the emotional dynamics might get a touch difficult.

To conclude, it would be valuable to integrate into our theorisation of what happens in the course of the credit and other economic cycles and events, the emotional changes of the people involved as they act and live through these events. Very often people live with their emotions but barely notice them - they have no language or concept systems to describe their emotional responses and we may describe them as emotionally illiterate or immature. Not having reflected deeply on their own emotional responses and those of others, they may act in ways which are unconscious, lacking in self awareness. In my view the idea that human welfare can be best optimised by market actors who are not emotionally aware of the full effect on themselves and others of their actions, and who are just responding to price signals, is not believable. Further evidence for this is likely soon to be found in the psychiatric consulting rooms and on the hospital wards.

Brian Davey

3rd April 2008


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Brian Davey said...

Henry Low's comment reminds me of the comment of little dog's when they come across a lamp post to cock their legs up to. Thank you Henry for such a profound commentary on my article!