Free Absolute Risk by Steven Gore

guilt.
    “Let’s think back a few years, to the beginning of the mortgage crisis. Former chairman Greenspan testified before Congress and admitted—in his words—that 'there was a flaw in the model that defines how the world works’ and that ‘we obviously are viewing an economy that does not resemble our textbook models.’ “
    Abrams raised both his eyebrows and his finger like a teacher who’d led students into an intellectual trap.
    “Except the second comment was made in 1994, not in 2008—and in private, rather than in public, where it deserved to be heard. Which means that the Federal Reserve chairman knowingly encouraged the public in a delusion that he himself recognized as such.”
    The youngsters in the audience sat up, puppylike, as if their owner was about to toss them a treat.
    “And the country went more into debt and more into debt and the bubble grew and exploded and grew and exploded and wealth became more and more concentrated at the top and economic insecurity became concentrated at the bottom. And as sure as a syllogism, it has only gotten worse.”
    The puppies began panting.
    “It’s time to start with a new model. One that begins with the supposition that equilibrium is not the natural state of the market, and it’s not like water reaching its own level. A model that understands that the market’s natural tendency is to seek the extremes of expansion and contraction.” Abrams raised his finger again. “Once we begin from that assumption, the aim of the central banks ceases to be one of maintaining equilibrium by keeping the economy moving at peak speed—as if velocity alone will provide stability—but instead aims at reducing the vibrations and muting the effect of the gyrations—even if that means suppressing economic expansion.”
    That had been the practical implication of Ibrahim’s theory, but Abrams wondered whether Ibrahim had a chance to think it through that far. Or whether he’d even had time to think out its implications for risk management.
    “What is called risk management in financial circles is just quackery by another name. Investment banks and brokerage firms have wrapped themselves in a mythology that assures them that the tools they possess for managing risk actually do so. But they don’t. They fail because they plan only for small imbalances, temporary and minor losses of equilibrium, but not for the crises when they are most needed—and which they never see coming.”
    Abrams focused on the reddening face of Mitchell Allen Levinson, a Nobel Prize winner for the Efficient Market Theory of Portfolio Allocation. He’d made a billion dollars, and then lost five, as head of ML Capital Partners. Abrams had watched him follow a self-hewn path from theoretical argument toward the cliff edge of practice, and then into a naked freefall through the pages of the
New York Times
and
Business Week
and
Fortune.
    Abrams smiled to himself as he recalled the last of the three-part
Economist
series that had reported that Levinson was now back to teaching Econ 101 at Michigan State, that his private jet was now owned by the CEO of Relative Growth Funds, and that the woman he’d divorced his wife to marry, and who’d once found his bald spot so endearing, had now decided that she only wanted to be friends.
    “More fundamentally,” Abrams continued, “the theories by which we have managed both the economy and our investment practices are driven not by science, but by …”
    Ivan Kahn, the mule-teethed 1970s radical, now the economy writer for
The Nation,
made a fist as if his favorite football team, six points behind with thirty seconds to play, had just made a first down at the one-yard line. Abrams imagined him finishing the sentence in his mind with the word “greed” or “corruption” or “selfishness,” the assumed sins of the wealthy.
    “But by our having forgotten the real purpose of economic growth, which is to reduce the quantity of human suffering, not to