Why the Financial Commission Hearings Will NEVER Get It Right!

Tomorrow begins another congressional investigation into what went wrong in the financial crisis and what happened at the banks. Senators will talk forever about subjects they really do not understand and big bank CEO's will be on the hot seat... again.

Does anyone realize that hating bankers is a cyclical phenomenon as old as the hills? The money changers have always been a "dirty lot" and yet any marginally functioning economy can't work without them - they are indeed the wheels AND the grease.

Worse however is that there isn't a chance that some greater understanding will be borne out of these hearings!

First there is the complex issue of open widely traded markets on exchanges versus relatively small and closed OTC markets like those that existed in CDO's and CDS'. I mean really - in short  you can sum up the crisis by understanding that as soon as one player (BSC) hinted that the value of subprime debt was declining, everyone else immediately said "NO BID" and mark to market accounting kicked in to decimate the balance sheets of every instiution who had ever played this rather "elite" game of musical chairs.

Did AIG write too many CDS'? Well yes apparently - as the value of what was insured outweighed the underlying assets but no one was counting! 

But even that doesn't explain why congress simply cannot get it right - at least not yet. A very popular book - How We Decide by Jonah Lehrer - outlines most of today's neuroscience about risk decision making. And I choose the word most very carefully! See even as good as Lehrer is - and he is very good - he too falls prey to the phenomenon of failing to understand the central and overriding role of the social and emotional factors in all decisions.

What I am saying is the model of human risk decision is way off. Lehrer gives enormous heed to the idea of not being rational but in the end more or less says "try harder to be rational".

Has it occured to anyone that maybe being rational is overrated? Or, at least as far as understanding the crisis that using any sort of 'rational-punishment for irrational model' isn't going to get us anywhere?

We need to understand the risk decisions that were made in terms of "keeping up with the Jones' ". We need to understand the urge to trade as the fear of missing out on money that someone else could be making - because this was the motivator for the banks.

Senators can ask questions all year long. They can put new legislation on the table that limits banks profts, taxes them, punishes them for bonuses... and what will happen? The hedge funds will become lenders. China will become a lender to small US business ... and then another crisis will ensue.

It is time, as David Brooks of the NYTimes says, for the social and emotional neuroscience to make it into the real world. It is then and only then that understanding the trading decisions made on big bank desks - or even those made on the desks of small independent traders -  will have a chance at being truly more accurate in the assessment and perception of risk!