I’ve been reading a biography of the transcendental Indian mathematical genius Ramanujan and thinking about the current economic crisis. What does the one have to do with the other? They are both extraordinary and we are helpless when confronted by the unique. Many commentators in the wake of our immediate economic duress fault the government for not preventing it. Similarly many Indians criticize their educational system specifically and government generally for not treating Ramanujan and his once in a century genius better than they did.
I think both a unique crisis and a magical genius can be treated no other way than the government is now messing up our economy and the desultory way Ramanujan was largely ignored by his compatriots. No one hits a home run who has never seen a baseball before.
Start with Ramanujan. Showing a genius for mathematics beyond the ken of anyone around him as a teenager, he flunked important exams twice because he wouldn’t study anything except mathematics. He lost his scholarship and didn’t receive a degree. He was so far ahead of everyone else that at first (or second or third…) glance no one could tell if he was a quack or a genius. Even England’s greatest mathematician, GH Hardy – Ramanujan’s mentor at Cambridge, took a while to realize what he was dealing with.
How can any system be prepared to do justice to a student who appears once in a century and who appearance might just as well be in Montana or Madrid as easily as Madras? There’s no way to prepare the soil for the seed of magical genius. One can only hope it drops on fertile ground. How many other Ramanujans withered before harvest in India? Probably none. Because a genius of his magnitude is likely to appear no more than once every few thousand years in any one country. The list of intellectual magicians is very short. Indian pedagogues and bureaucrats should not be too hard on themselves. They did the best that could be done under the circumstances.
Governments, democratic or autocratic, fail to respond to an economic crisis at their peril. If the crisis is unprecedented they will get their response wrong. Governments like generals are always prepared for the last war. When fiscal disaster strikes they will always be accused of failure to regulate properly. It couldn’t be otherwise. If they had regulated correctly there wouldn’t be a crisis. And if the crisis is truly new they would have had to anticipated it. If they were anticipating this crisis they would have had to prevent the infinite number of other crises that didn’t happen. Some one is always screaming that the sky is falling. But it actually does fall only once every generation or two. To prevent all the false sky fallings government would have to regulate society past paralysis.
The current catastrophe seems to have occurred because the government encouraged (or forced) lenders to loan money to people who were poor credit risks. This with good intentions, convinced that all should own homes beyond their means. Banks have always sold their mortgages to larger third parties to free up money on their books so they can make more loans.
This time the third parties realizing they had some potentially bad loans in their portfolios securitized them with other less risky loans. The principle here was similar to that of insurance portfolios. The failure of some will be made up by the success of others. The long term increase in real estate values made these kinds of bets look good. So why not add a few more marginal (or worse) loans to the basket. Eventually the loans got repackaged and sold so many times that no body knew what was in what. It was a perfect example of one of life’s basic problems. Going from A to B is logical, so is B to C. Keep going until you get to Z. Then look only at A and Z. What you see is totally illogical. You’ve gone crazy by a series of logical steps. It happens all the time because the actors can’t see where they’re ultimately going – which is off the cliff; not even when the last fatal step is taken.
Then finally the cliff is breached. Government reacts the way it always does. It proclaims that unless extraordinary action transpires the world will end. Who wants to prevent government from forestalling Armageddon? So the government acts. The problem is that what it does is not extraordinary. It’s exactly what it should have done at the last crisis, but didn’t. Appropriate for then, but dead wrong for now. What should the government do? Who knows? We’ll figure that out several decades from now in time to do the wrong thing the next time around. In the meanwhile the public gets scared to death and looses all confidence in anything to do with money. This failure of confidence induced by the government’s prompt action secures the coffin’s lid. The government had to act but in doing so it ensured the catastrophe it had to pretend to prevent.
In the meantime we’ll enact regulatory schemes that will prevent this disaster from happening again, but which will be inapposite for the next new way of going wrong. Those who remember the lessons of history are doomed to make new mistakes. History is fun to read, but is almost useless as a guide for the future.
As an aside, you’ll often hear (usually by people who want the government to spend more money) that we didn’t get out of the great depression of the thirties until we entered World War II and really started to spend big bucks. I suppose that could be true. But there’s another possible explanation. We had the only large economy left intact by the war. Economically we couldn’t have gone wrong. We were not only number one, we were all the other numbers between one and 100.