- “What you see is all there is. We don’t react to things we don’t know about.”
This remarkable but common sense insight is a major theme of economist Daniel Kahneman’s new book, “Thinking, Fast and Slow, ” just published and already on the best-seller list.
We did not know that the Fed has spent the mind-boggling total of $7.7 trillion in loans to many of the key financial institutions in the world during the 2008 meltdown; including $1.2 trillion in a single day, December 5th, 2008– after other costly steps had been taken to put capital in the major banks, Citigroup, Bank of America,Goldman Sachs, Morgan Stanley— and a host of European banks as well.
Had we known the extent of the money being lent through the Fed open market window– even though the money had collateral behind it– would we have been more frightened– or more secure in our temperament, and so willing to risk our money as well.? I reckon I would have been more frightened, and I’m glad I didn’t know.
But, the revelation after the fact is bound to stir up the conspiracy gang and lead to sharp political debate about the independence of the central bank. Thank God Ron Paul has no chance whatsoever.
What we still don’t know is whether all that nearly $8 trillion was necessary. Instead of looking backwards, it’s more crucial to look forwards.
What don’t we know about Europe, about the murky, non-transparent plans to stabilize Italy, France, Portugal, Spain and the U.K.? It’s frightening to think what isn’t known about the machinations in Paris, Rome, Frankfurt, London and Lisbon All we know is there’s a mountain of debt everywhere (see my “The UK has 460% debt to GDP”) Both sovereign debt and bank debt– all interwoven in a web of danger.
We cannot know for certain– but only imagine– that the solution will involve that tired warhorse of more debt floated to pay off or service old debt. We can only hope that the ECB, the Bundesbank, the IMF and others will copycat the Fed– and make funds available.
As our behavior is often ruled by what we can’t see, I guess the safest route is to sell European sovereign paper and bank shares. We’ll not know the true extent of what is happening in Europe that we can only see on a piecemeal basis– until we become more aware of what is in store for us.
It all makes me edgy, and wondering about all the other things I don’t know– like the hope that China will have a soft– not hard landing; that Pakistan’s nuclear warheads are indeed under tight, sane control; that Iran is far from developing a nuclear bomb; that the US will resolve the debt crisis at home without going into a lost decade like Japan.
That’s just the top rung of what we don’t know. “What you see is all there is.” What level of discount does Kahneman’s finding deserve? I’m not sure.
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