Masochistic Markets

A masochist is one who derives (usually sexual) pleasure from being hurt and/or humiliated. Often commingled with sadism (S&M), it is related to but separate from other sexual deviations, such as dominance & submission and bondage & discipline. The whole subculture derives it name from the writings of such authors as the Marquis de Sade and Leopold von Sacher-Masoch.

Modern psychologists believe S&M is less about sex and more about control. The control craved by a sadist is straightforward; it is more subtle for the masochist. The masochist seeks to control another individual by placing (i.e. forcing) the other into a position of dominance over them. Masochists desire the compliance, helplessness, and even pain that follow their submission because these provide a therapeutic escape from stress, responsibility, and guilt.

After watching them in recent months, and especially over the past week, I have begun to suspect that Wall Street and other markets of forsaking their long-standing love affair with free, unfettered capitalism and twisting themselves into a distinctly masochistic bent for government intervention and regulation.

These masochistic markets have chosen U.S. Treasury Secretary Timothy Geithner to portray the role of Marquis de Sade in their caprice. Unfortunately, for them, Geithner is ostensibly too much a straight arrow of capitalism to play along.

Yesterday, Geithner unveiled a much-touted plan by the Obama Administration to make financial markets more accountable as it attempts to spend the rest of the TARP money authorized it by Congress and perhaps look for more beyond.

His proposals were generally panned as good intentioned but lacking in details. Yet the vacuity of Geithner’s proposals was entirely intentional, if Oval Office scuttlebutt is accurate.

Geithner apparently emerged the winner from a hot and heavy debate with Obama’s senior advisor, who wished to place restrictions far more draconian on financial institutions seeking federal aid. They worried the poor economy and populist anger over extravagant executive compensation could cause a backlash if government did not tighten the screws on companies receiving bailout money.

For his part, Geithner worried the bailout would not work if there was too much government intervention and restrictions over markets and industries. He also worried that extensive government regulation would discourage private investment.

It makes sense intrinsically. Yet one only has to watch Wall Street’s reactions to two Geithner announcements in the past week to see logic is standing on its head these days in the markets.

Last Wednesday, Geithner stood solemnly next to Obama as the President announced the imposition of executive salary caps and other strictures for any firms accepting additional federal monies. The Dow’s response was slowly to gain about 150 points over the next several days.

Yesterday, Geithner disclosed the “business friendly” TARP restructuring for which he had fought so hard. The Dow nose-dived over 380 points over a single afternoon in reaction to his largesse.

Given the anger they face from the public and the calamitous uncertainty of recent months, banking and investment firm CEOs would rather face up to harsh details than receive no details. In their own weirdly controlling way, they want the therapeutic release of forcing the Obama Administration into a position of telling them what to do.

They want to know what new regulations and restrictions they will have to exchange for additional capital, even if those restrictions are more stringent than anything associated with TARP to date. They want to know what value the Treasury and Federal Reserve will place on “bad assets,” even if that value is less than what they paid for them. They want government to stem the tide of foreclosures, even if that means federal judges forcing them to accept reduced mortgage payments.

At the macro level, this impetus may well be subconscious on the part of markets. However, there is no doubt that some financial executives consciously understand their own culpability in creating the current mess and desire some form of punishment/reckoning.

“Many people believe – and, in many cases, justifiably so – that Wall Street lost sight of its larger public obligations and allowed certain trends and practices to undermine the financial system's stability,” said Lloyd Blankfein, Chairman and CEO of the Goldman Sachs Group Inc.

In an op/ed piece for the Washington Post, Charles Munger, Vice-Chairman of Berkshire Hathaway Inc., is even more direct. “Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes.”

“Sensible reform cannot avoid causing significant pain, which is worth enduring to gain extra safety and more exemplary conduct,” Munger continues. “And only when there is strong public revulsion, such as exists today, can legislators minimize the influence of powerful special interests enough to bring about needed revisions in law.”

Garry Evans, Chief Asian Equity Strategist with HSBC in Hong Kong, said Geithner was skirting around what many investors have already concluded – the U.S. may have to nationalize banks for a period.

Geithner offered to be a doula for bankers and help them work through their pain when the thing bankers really seem to want is a dominatrix.

Geithner was afraid that too much tough talk would scare away investors when investors had apparently decided they liked it when the Obama Administration talked dirty to them. They were disappointed when it failed to then tie them up and spit on them.

Geithner decided the best approach was to offer lenders a mixture of carrots and sticks when all lenders appeared to fancy was for him to hit them with the sticks and tell them they had been very bad and did not deserve the carrots.

Geithner may not be ready to serve as the de Sade for these masochistic markets, either by training or personal inclination, but one thing ought to be clear to him by this point. If there is ever a good time for government to intrude on business and abrade it with regulations, it is when business asks it to do so.

Most contemporary psychologists do not view masochism as a sickness, so long as all the participants involved are consenting. Thus, while offering treatment for it through analysis and other means, individuals are not so much “cured” of their masochistic longings and behaviors as outgrowing them.

Maybe such will be the case with our current masochistic markets, when and if the economy grows more solid and secure. Until then, the Marquis de Geithner needs to crack the whip with them . . . in more ways than one.