Ages ago, when his name was still one to conjure with, I took a long walk with John Seely Brown to discuss the applicability of literary criticism to the success of inventions. My recent ex at the time had gotten a thesis and several books out of the idea (going back to kierkegaard at least) that it was in many ways impossible for people schooled in 19th-century traditions to read modern writers, so I was primed for the discussion. What Brown’s researchers had found was that new gadgets were usable — at least at first — only insofar as they could be understood as a better/faster/smaller X, where X was a genre of technology that people already thought they understood.
That meant innovators had to think about how the things they were creating fit into existing ideas about the world (most obvious case: the desktop metaphor) and/or tell stories about the world that shifted people’s perceptions in ways that made new gizmos more comprehensible and acceptable — just as modernist writers have so often had side gigs as book reviewers and manifesto-promoters. And people who bought and tried to use the new tools had to learn — and sometimes privately revise– the stories they were told, until they had something that made sense.
The history of recent tech is littered with innovations that have stories, from blogs to “community” to android phones and e-book readers. Some of the stories make sense, some of them don’t, or at least not yet.
So now let’s apply this to financial innovations. All the fancy mortgage instruments, for example, were billed as cheaper/more flexible/more accessible/longer/lower/wider/faster versions of existing mortgages, even when they were only barely related to same. (Really: the last time people were issuing loans with no verification of income stream and options to add the first few years’ payments to the loan balance was during the savings&loan scandal, and most of them ended up in jail.) But the story made for good sales.
And the fancy instruments the big boys played had their own set of stories as well. They were just well-analyzed aggregations of existing securities, or adaptations of well-understood methods of laying off risk (never mind that the last time the insurance industry had a crisis they found out that no one had a clue of who had laid off how much risk to whom, or how much had come right back to its original roost). And in a sort of bitch-slap version of the usual genre issues, if you thought that they were too complex and opaque for people to be trading safely, then you clearly didn’t have the analytical chops and were better off playing in the low-risk kiddie pool.
That last bit is important because of the way it intersects with Keynes’s dictum that the market can stay irrational longer than you can stay solvent. In this particular case, the irrationality consisted in believing the stories being told about all these opaque financial instruments. If you decided to trade in them (with the exception of a few very-deep-pocketed pessimists who took the short sides of transactions) you pretty much had to accept the models that everyone else was using, or else your valuations would be way off from everyone else’s, and you’d get clobbered in the day-to-day shifts. Playing that particular game involved accepting the shared consensual hallucination — buying into the MBS/CDO genre — so that your conversations, as expressed in bids and asks, would be mutually intelligible.
And once everyone was speaking the same language, they were all lost.