Why were the 00s So Bad?

Financial markets in the 00s were dominated by the Individualist point of view described in Cultural Theory.

The Cultural Theory idea of four risk views provides some interesting insights regarding the financial crisis.

In Cultural Theory terms what happened to create the crisis was that Individualists were given control over too much of the world’s resources. Meanwhile, Authoritarians and Egalitarians degree of control over Individualists was almost totally eliminated. (Fatalists usually do not control anything for long.)

Hyman Minsky accurately describes what happens to Individualist systems – they go from investment to speculation to Ponzi to collapse.

When Individualists control fewer resources, take for example the 1987 stock market crash, there was not a major impact outside of the highly Individualist financial markets to hurt the “real” economy. When Individualists control moderate amount of resources, their cycle of financial instability ends in a mild recession. With too much resources in the hands of Individualists, a major financial crisis results.

But why did that happen? Why did Individualists get so much of the resources?

As Minsky observed; “Stability is destabilizing”

Cultural Theory makes two similar observations that help to explain what happened.

1. Each of the four views of risk is correct some of the time. (But not all at the same time – so in any period of time 3 out of 4 are incorrect.)

2. With each passing period during which their world risk view is not validated, some people shift their view to the one that has been validated by events.

Allegiances to these four risk views shift over time.

So favorable financial times led more and more people to shift their view to Individualist. The normal Individualist cycle of investment to speculation to Ponzi to crash happened.

The adverse events of the financial crisis are clearly contrary to the Individualist mean reverting idea of risk and will cause many people to now shift away from an Individualist view of risk.

As long as that trend holds, the Teens decade will end up very different from the 00s.  We must wait to see whether the Authoritarians or the Egalitarians end up dominating the decade.

The political debate in the US is over whether we must return to an almost purely Individualist system or if we can live in an Egalitarian system.

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One Comment on “Why were the 00s So Bad?”


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