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‘Manic’ behaviour led to 2008 credit crisis: Study

Western economies displayed the same kind of manic behaviour as psychologically disturbed individuals in the run-up to the 2008 credit crisis — and it could happen again, a new study has warned.

world Updated: Jun 08, 2012 01:22 IST

Western economies displayed the same kind of manic behaviour as psychologically disturbed individuals in the run-up to the 2008 credit crisis — and it could happen again, a new study has warned.

Bankers, economists and politicians shared a “manic culture” of denial, omnipotence and triumphalism as they threw caution to the wind, says professor Mark Stein of the University of Leicester’s School of Management.

Observing, but not heeding, the warning signs from the collapse of the Japanese economy in 1991 and the 1998 crisis in south-east Asia, the financial world in the West went into an over-drive of denial, escalating its risky and dangerous lending and insurance practices in a manic response, he says.http://www.hindustantimes.com/Images/Popup/2012/6/08_06_12-metro15.jpg

Professor Stein, who was on Thursday awarded the iLab prize for innovative scholarship, identifies and describes this manic behaviour in the 20-year run up to the credit crisis in a paper published in the Sage journal Organisation, a university release said.

The causes of the banking collapse that plunged the UK and many other countries into recession have been well documented but an important question remains: Why did economists, financiers and politicians fail to anticipate it?

Stein argues that the financial world was suffering from collective mania in the two decades running up to the events.

“Unless the manic nature of the response in the run up to 2008 is recognised, the same economic disaster could happen again,” he warned.

He defined the manic culture in terms of the four characteristics of denial, omnipotence, triumphalism and over-activity.

“A series of major ruptures in capitalist economies were observed and noted by those in positions of economic and political leadership in Western societies,” he said.

“These ruptures caused considerable anxiety among these leaders, but rather than heeding the lessons, they responded by manic, omnipotent and triumphant attempts to prove the superiority of their economies,” Stein said.