Emotions in Finance

Fear and greed are terms that make light of the uncertainty in the finance world. Huge global financial institutions rely on emotional relations of trust and distrust to suppress the uncertainties. Many financial firms develop policies towards risk, rather than accepting the reality of an uncertain future.

   Emotions in Finance examines the views of experienced elites in the international financial world. It argues the current financial era is driven by a utopianism – a hope – that the future can be collapsed into the present. It points out policy implications of this short-term view at the unstable peak of global finance.

   This book provides a timely account of the influence of emotion and speculation on the world’s increasingly volatile financial sector. The author includes absorbing interview material from public and private bankers in the United States, UK and Australia.

Jocelyn Pixley is a senior lecturer in the School of Sociology and Anthropology at the University of New South Wales, Australia. She is the author of Citizenship and Employment.

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Emotions in Finance

Distrust and Uncertainty in Global Markets

Jocelyn Pixley

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PUBLISHED BY THE PRESS SYNDICATE OF THE UNIVERSITY OF CAMBRIDGE
The Pitt Building, Trumpington Street, Cambridge, United Kingdom

CAMBRIDGE UNIVERSITY PRESS
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© Jocelyn Pixley 2004

This book is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without
the written permission of Cambridge University Press.

© M. E. Sharpe Inc. for reproduction of p. 69

First published by Cambridge University Press 2004

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Typefaces Adobe Garamond 10/12 pt. and Frutiger System LATEX 2_e [TB]

A catalogue record for this book is available from the British Library

National Library of Australia Cataloguing in Publication data

Pixley, Jocelyn F. (Jocelyn Florence), 1947–.
Emotions in finance.
Bibliography.
For tertiary students.
ISBN 0 521 82785 X.
ISBN 0 521 53508 5 (pbk.).
1. Business enterprises – Finance.   2. Risk management.   3. Speculation. I. Title.
658.155

ISBN 0 521 82785 X hardback
ISBN 0 521 53508 5 paperback

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To the memory of my parents, Lorna and Neville Pixley

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Contents

Figures			viii
Interviews 2000–2002			ix
Preface			xiii
Abbreviations			xv
1		Global Markets or Social Relations of Money	1
2		Emotion in the Kingdom of Rationality	17
3		The Financial Media as Institutional Trust Agencies	43
4		Emotions in the Boardroom	67
5		Credibility and Confidence in the Central Banks	94
6		Hierarchies of Trust	113
7		Overwhelmed by Numbers	133
8		The Time Utopia in Finance	157
9		Implications: Emotions and Rationality	183
References			209
Index			219

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Figures

4.1		Determinants of the State of Expectation	page 69
4.2		Role of Emotions in Expectations and Decision-making	70

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Interviews 2000–2002

FORMER CENTRAL BANKERS

New York – Washington DC, February–March 2002

Alan Blinder: former Vice Chairman of the Board of Governors of the US Federal Reserve System (1994–96); now Professor of Economics, Princeton University, NJ

Lyle Gramley: former Governor of the US Federal Reserve System (1980–85); then at Mortgage Bankers Association of America, Washington DC

UK, March 2002

Sir Alan Budd: former Chief Economist for HM Treasury (1991–97), and former Chief Economist of the Bank of England, also former member Monetary Policy Committee (1997–2000); now Provost, Queen’s College, Oxford

The late John Flemming: former Chief Economist (1984–91) and Executive Director (1988–91) of the Bank of England; then Warden of Wadham College, Oxford

Charles Goodhart: former Chief Adviser, Bank of England, former member of the Bank of England’s Monetary Policy Committee (1997–2000); now Professor of Banking and Finance at the London School of Economics

Canberra, August 2001

B. W. Fraser: former Governor, Reserve Bank of Australia (1989–96); now board Director, Members Equity and Industry Super. Second interview, 29 June 2002

FINANCIERS AND BANKERS

London

Henry Dale: former banker for fifteen years at Crown Agents, October 2000

Michael Lazar: formerly de Broe, then Schröder’s, stockbrokers (1980s); also HM Treasury (to 1994), June 2001. Second Interview, March 2002

Roderick Chamberlain: Coutts Consulting Group; formerly securities broker in the Royal Bank of Canada, Nomura International; Trustee (from 1987) then Chair (1997–2000) of the Institute of Business Ethics, March 2002

Tim Shepheard-Walwyn: formerly Bank of England, then Securities and Investment Board; former Head of Risk Management at SBC (now UBS), also Barclays Bank, March 2002

New York and Pennsylvania 2001–2002

Henry Ouma: former Managing Director of Investments, UN Pension Funds, NYC, May 2001

Henry Kaufman: former Vice-President, Salomon Inc. ‘Dr Gloom of Wall Street’. NYC, May 2001. Second Interview, February 2002

Chia Sieu Wong: former investment manager for sixteen years with a large Wall Street investment firm and other investment firms. NYC, May 2001

John Bogle: Founder and former CEO of Vanguard Group of Mutual Funds; Valley Forge, PA, March 2002

Sydney, February 2002

John Edwards: Chief Economist, HSBC, Australia and New Zealand and former Senior Adviser, economic (1991–94) to the Prime Minister of Australia, Paul Keating.

Zürich, Switzerland April 2002

Dr Werner Frey: former CFO and Director Bankleu, and then Credit Suisse; now Management Consultant, Ramistrasse 36, Zürich

Paul Chan: Managing Director, Group Risk Analysis, UBS AG Financial Services Group, Bahnhofstrasse 45, Zürich

Georges Schorderet: CFO Swiss Air; formerly CFO Alusuisse Lonza, Zürich

FINANCE JOURNALISTS

New York City, September 2000

Alan Abelson: Former editor, now lead columnist, Barrons, the Dow Jones Business and Financial Weekly. Second interview, May 2001

James Grant: Publisher-editor Grant’s Weekly Interest Rate Observer ; regular finance commentator on CNN and panellist on Wall Street Week

Anya Schiffren: Former reporter for Dow Jones; then Industry Standard, now at the School of Public Affairs, Columbia University

Brian Hale: Wall Street correspondent, Sydney Morning Herald and The Age (formerly, later for The Times).

Daniel Kadlec: Finance journalist, Time Magazine, February 2002

London

Larry Elliott: Economics editor, The Guardian, October 2000

Dominic Ziegler: Finance editor, The Economist, March 2002

Graham Ingham: formerly with the BBC; now economic journalist, The Economist, March 2002

Robert Peston: Former finance editor, the Financial Times; now finance columnist, New Statesman. Telephone Interview, London March 2002

Sydney, January 2000

Trevor Sykes: Senior journalist, Australian Financial Review and ‘Pierpont’ column.

V. J. Carroll: Former editor, Australian Financial Review from 1964; former editor-in-chief, Sydney Morning Herald until 1984. Second interview, January 2001.

FINANCIAL PUBLIC RELATIONS

Jonathan Birt: Financial Dynamics Business Communications, Holborn Gate, London. March 2002.

CONFIDENCE SURVEY ANALYSTS

Ken Goldstein: Economist, The Conference Board, 845 Third Avenue. New York, February 2002

Duncan Ironmonger: Professor of Economics, University of Melbourne; Analyst Dun & Bradstreet Expectation Surveys. Sydney, December 2001

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Preface

   HOW I CREATED the precise idea of Emotions in Finance is the only event I cannot recall. My background in economic sociology led to some useful discoveries about the finance world. My work defending full employment and social policy was a bore to my postmodern colleagues and beneath contempt to neo-classical economists. From 1996, Australia’s new right-wing government stifled policy debates: instead of decent employment we were to join a mainly Anglo-American society of shareholder capitalists; our compulsory superannuation must offer ‘choice’. Globalisation, by 1997, had become a fashionable term, but I was struck by the IMF’s treatment of our neighbour Indonesia: brutal yet totally incompetent. Meantime, I was reading the work of two sociologists, Jack Barbalet’s on emotions and Geoff Ingham’s on money as a social relation. Both struck a chord just as the dot.com boom was becoming insane. I am old enough to have experienced Australia’s ludicrous mining boom. The scrip of Poseidon and Minsec shares bought by my former husband became pretty gift wrapping in 1971, we joked in that carefree time of jobs and freedom. My parents were of the cautious generation. To my mother, a mortgage was OK, better was paying it off. My father was a ‘managing director’, not a sainted CEO of today. Each had ‘blue chip’ share portfolios and we lived comfortably.

   During the dot.com insanity, modest investors and the millions in investment funds were blamed for their emotions. As part of my world view, I had never been impressed by high finance’s mendacity, its promotion of globalisation and its increasing lack of caution. Sociologists seemed captivated either by virtual money or a financial conspiracy, but I took another view, seeing the emotions of uncertainty as the key. Moreover, being on the periphery, Australia is a good vantage point from which to investigate the financial core, since Australia’s business sector has copied and amplified its excesses. But we, the people, can temper globablisation, and instead strengthen commitments to international agreements in which economic policy serves social purposes and democratic processes, for which Australia once had some reputation.

   Emotions in Finance was the title that attracted my two great publishing editors at Cambridge University Press: Peter Debus who enthusiastically and carefully saw me through, and Phillipa McGuinness who commissioned my idea. When I concluded, I briefly toyed with another title: High Finance, Deep Uncertainty. But when I began, my theoretical scepticism required evidence. What were the precise emotions that prevail? I needed ‘informed sceptics’, so I interviewed a number of influential people in the financial world. They gave me enormous support, arranging for me to interview others, carefully correcting my transcripts and revising their quotes (John Flemming only months before he died) and responding to my further queries generously, Henry Dale in particular. Many whom I lacked space to quote were also enormously helpful. I thank them all: while I am solely responsible for my conclusions, their own wisdom and commonsense shines through.

   Jack Barbalet and Geoff Ingham gave sound advice, perfect references to other works and read the crucial chapters. Peter Kriesler has been my closest economic advisor: reading vast chunks of early drafts and tirelessly improving my sociological translation of Keynes. Paul Ormerod supported all my unorthodox endeavours, suggested interview questions on probability, introduced me to Meghnad Desai, Robin Marris and others in London. Both exceptional themselves, Carol Heimer helped me on one path to all the best in Chicago’s economic sociology, while June Zaccone sent me to the best New York economists. My other debt is to V. J. Carroll, who inspired me about the urgent need for more sociological than economic analysis in the public domain, and to Mike Lazar, similarly.

   There are many others (whole households in other countries) to whom I am grateful. Most and best of all two: my son Sam Dawson became an inadvertent and brilliant research assistant in New York City, Chicago, London and Canberra, at our own expense, and then my main informal editorial advisor. My daughter, Louisa Dawson, formulated ideas for design that ultimately became the cover: artists see while we just write. Both have firmly put up with my obsession involved in writing any book. I had enormous collegial support from my whole School, so while Clive Kessler found my most felicitous phrases and kept me going while Mum was dying, and Paul Jones helped in our shared teaching and was the source of my media understanding, everyone was great. Beyond my School, Michael Johnson saw the whole point of my early idea for the research; Alan Morris and Robert Milliken helped introduce me to financiers and journalists. The Faculty of Arts and Social Sciences at my university have been helpful for years, especially with my Writing Fellowship in 2003; so too the Australian Research Council in grants. Antonny Ivancic provided thoughtful research work, Aileen Woo and Louise Fraser similarly on the manuscript and transcripts, and Harry Blatterer translated, theoretically too, entscheidungsfreudig. Venetia Somerset, as the book neared completion, gave scrupulous copy-editing and calm intelligence to see the book out, and while with thanks to so many, any inadvertent errors are mine.

Jocelyn Pixley
August 2004

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Abbreviations

AIB	Allied Irish Banks plc
AFR	Australian Financial Review
AMP	Australian Mutual Provident Society (Established January 1849; demutualised January 1998)
AOL	America Online
APRA	Australian Prudential Regulation Authority
ATTAC	Association pour une Taxation des Transactions Financières pour l’Aide aux Citoyens
BCCI	Bank of Credit and Commerce International
BoE	Bank of England
BoJ	Bank of Japan
CADs	Current Account Deficits
CB	central bank
EBRD	European Bank of Reconstruction and Development
ECB	European Central Bank
EMH	efficient market hypothesis
FASB	Financial Accounting Standards Board (USA)
FD	financial disclosure
FOMC	Federal Open Market Committee (US Federal Reserve System)
FSA	Financial Services Authority (UK. Established under the Financial Services and Markets Act 2000)
FT	Financial Times
GDP	Gross Domestic Product
HSBC	HSBC Bank Australia Limited (founded as the Hongkong and Shanghai Banking Corporation Limited in 1865)
HIH	HIH Insurance Limited (Australian-based)
ICI	Imperial Chemical Industries plc
IMF	International Monetary Fund
ING	ING Group (First titled Internationale Nederlanden Group in 1991)
IPO	Initial Public Offering
IT	information technology
LBO	leveraged buyout
LTCM	Long Term Capital Management (US-based hedge fund)
MAI	Multilateral Agreement on Investment (not ratified)
M&A	Mergers and Acquisitions
MPC	Monetary Policy Committee (Bank of England)
NAB	National Australia Bank
NAIRU	non-accelerating-inflation rate of unemployment
NYSE	New York Stock Exchange
OECD	Organisation for Economic Co-operation and Development
PR	public relations
RBA	Reserve Bank of Australia
REM	rational economic man
S&L	Savings and Loan (known also as thrifts, US mutual savings banks)
S&P	Standard and Poor’s (US-based credit-rating agency)
SEC	U.S. Securities and Exchange Commission
SMH	Sydney Morning Herald
UBS	Union Bank of Switzerland (UBS AG since 1998)
WTO	World Trade Organization