My recent essay in The New Atlantis is now online. A sample:
At the back of the labyrinthine complexities of the financial crisis resides a particular cast of mind. That modern finance failed is plain enough, but it is not too much to say that the modern mind itself broke down. What deeper failures of the mind does the failure of finance disclose?
First, there is an error about property; next, there is an error about man. It will be useful to examine them separately, though in truth they derive from the same source, and together they compose an extraordinary and ruinous instance of the overreach of Rationalism.
At the very heart of the crisis and the subsequent bailouts is the elegant excellence of the engineered abstraction, produced by mathematical brilliance and computing capacity. All the messy variations of human activity in the area of real-estate finance could, seemingly, be brought under the reliable authority of graceful formulas. Every wager could be safely hedged, once the appropriate calculations were run.
The modern mind broke down on account of its infatuation with abstraction. That mind is singularly susceptible to falsely imagining that ideas are more real than men. The power of the lapidary theory over the modern mind has been often remarked. The whole of the twentieth century was marked by calamitous wars driven by the imperial impulse of what Edmund Burke called “armed doctrines.” Armies, impelled by their doctrines, rolled over half the earth, leaving behind blood and smolders.
In finance, this failure of the modern mind, its subjection to the allure of formula and abstraction, took on another aspect: the reduction of property to mathematical abstraction. The nature of property itself seemed to transform under the influence of these abstractions. The old and familiar debt instrument known as a mortgage is already an abstraction from real physical property. Pooling these instruments into complicated securities is another step of abstraction. And, in still further steps of abstraction, probabilities concerning default rates on property debt were converted into revenue streams that could be securitized. Credit-default swaps were rolled into new revenue streams and resold. Collateralized debt obligations were “squared.” Little fragments of land and housing, from neighborhoods of enormous variety all across the country, were converted by statistical abstraction into an unfathomable infrastructure of debt securities. [continue reading]