‘So long as the music is playing, you’ve got to keep dancing.  We’re still dancing’.  Chuck Prince was interviewed by this paper only a month before the music stopped. A few weeks later he was out of a job.  With these comments, he got to the heart of the banking crisis.

Economists search for rational economic explanations of apparently irrational behaviour.  They emphasise skewed incentives and asymmetric information.  There is something in these descriptions.  But there were financial panics long before there were Wall Street bonuses.  There were financial panics long before the invention of limited liability.

Prince’s metaphor is sociological and anthropological not economic.  Groups routinely demonstrate behaviour which few if any members would choose to adopt as individuals.  Look at teenage gangs, football crowds, religious zealots – or clubbers.   Sometimes the group provides a cloak of legitimacy for misbehaviour:  football fans do things they would be fearful of the consequence of doing on their own and ashamed to do in front of their wives.  The trading floor has a similar effect.  You get carried away, explained Jerome Kerviel, Société Générale’s former trader. The process by which hysterical groups damage themselves and others in assertion of preposterous beliefs is a recurrent theme in human history.   We see it in anti-Semitic pogroms, or McCarthyite persecution.  Before the mysteries of structured credit there were the mysteries of witchcraft, before investment banks used IPOs to turn dot.com concepts into billions of dollars alchemists claimed to turn base metals into gold.

Shared values and beliefs create a group identity.  No matter that the beliefs may be absurd or the values contemptible:   that Salem was not besieged by witches, the United States was not threatened by Communist infiltration, that greed is not good, and that suicide bombers will not be greeted in paradise by seventy-one virgins.  The very improbability of the belief, the unacceptability of the values, reinforces their social function; these factors distinguish the real members of the group from the less committed.

Gangs differentiate themselves by their characteristic beliefs and values.  Your performance as a gang member is judged not by rational, objective criteria, but by the approbation of your peers.  As on the streets, also in the office towers.  The people on the floor above fix your bonus and advance your career.  

Some beliefs and value systems are more successful than others.  The effortless superiority prized at Goldman seems to have served it well in the sub prime crisis.  The extreme aggression of Bankers Trust and CSFB in the 1990s led ultimately to the destruction of these organisations as independent businesses.  But always, the beliefs and values that matter are local, not global; subjective, not objective; and to question the prevailing culture is to exclude yourself from the group.  

Were the people who presided over the promotion of dot.com stocks liars who knew what they were saying was false? Or were they fools who believed it themselves?   Did the people who said that structured credit products were a new and more sophisticated way of managing risk exposures really think this was true? Or had they simply latched on to an academic theory that fitted their self interest?

The analytic mind argues that one or other explanation must be true.  But neither need be. Like the politicians who invaded Iraq, executives of major financial services businesses did not reflect on questions to which they did not wish to know the answer.  The greatest enemy of rationality is the unenquiring mind.  We sometimes call it group think, but it is the antithesis of thought.

Sympathise with Chuck Prince’s dilemma – although, given the size of his payoff, do not sympathise for long.  If he had decided to pull Citigroup back from its increasingly frenzied trading and lax lending, he would have been deposed – by shareholders desperate for profit, non-executive directors steeped in conventional thinking, and above all by subordinates hungry for bonuses.  The gang leader despite his apparently unquestioned authority, is frequently the prisoner of the gang members.  The man who occupied the chair at Citi, ostensibly the most powerful position in the global financial services industry was in reality the pawn of his own employees.  That is what Prince meant when he said that so long as the music plays, you have to dance.