Summary

The author's objective is to find a meaning in the astonishing response of frozen paralysis on behalf of the federal reserve when faced with the subprime mortgage crisis. The author's first procedural move is the fictional reduction of the subprime crisis to a plot acted out on the stage by two actors, the wretched house borrower without money and the predatory loan-giver, watched by a third actor, the Fed. In the fictional distribution of characters, the Fed plays the role of a terrorized little girl exposed to the traumatic scene of her perverse parents engaged in a mortal struggle of reciprocal sado-masochistic exploitation. Following psychoanalytical teaching, this traumatic scene has its paradigm in the primal scene, the sexual intercourse between parents that the young child watches as an awful enigma arousing at once sexual excitement and fear. The response to the trauma of the primal scene places itself in a range of five psycho-biological reactions to the basic emotion of fear, among which the freeze reaction, the Fed's frozen paralysis. The original response to the primal scene, specific to each child, persists throughout life, guiding even political and economic choices. For example, it wouldn't be arbitrary to put together the freeze response of the Fed's representative Alan Greenspan to the mortgage crisis with his choice in favor of laissez-faire dominated free market economics, the principle of allowing the market to go at will, without intervening to change it. Both the response and the choice derive from the likely original freeze response by the infant Alan to his own primal scene in 1929.

Keywords: Mortgage Crisis - The Five-F responses to Fear - The Fed's frozen Paralysis - Alan Greenspan's Primal Scene - Terror of the Great Depression of 1929.


Preliminary Notes

People exposed to a life threatening danger may use any of the five most common responses, known as "the five Fs": freeze, fight, flight, fright, faint: i.e. chilling their actions and emotions, challenging or attacking, running away or hiding, being terrified, losing the senses. If someone chooses the freeze response we can say that they are stiffened, petrified, paralyzed by fear. Let's make the hypothesis that this person is an artificial one, a person whose words and actions have become representative of a group whose members have agreed to be represented by a single individual, just as the CEO of the Federal Reserve represents his board. Our thesis is that the Federal Reserve's inexplicable silence, dating as far back as 2000, with respect to the blatant human and financial drama of the subprime mortgage financial crisis, resulting from the criminal practices of shady speculators, is not so much due to a strategic laissez-faire free trade choice, nor to a superficial mistake on behalf of its board and not even to a cynical thrust towards an inflationary situation, but rather to a paralyzing response of the freeze type evoked by the terror of a possible return to the Great Depression of 1929.


The Subprime Mortgage Financial Crisis

To begin to try and find our way through the scenario of the subprime mortgage financial crisis, the financial crisis sparked off by high-risk mortgages, a good idea is to resort to, at least to begin with and only temporarily, particular fictional idealization operations. In other words, hypotheses.


The Idealized Scene of The Crisis Is Filled by Three Individuals

The first fictional idealization operation, or first hypothesis, consists in the simplification of available data and in the way they are selected, to the extent of reducing the individuals moving on the scene to a mere three actors, agents or persons: a) the borrower, the person who wants to buy a house with a mortgage; b) the lender, the mortgage provider, the broker, the speculator, like the Northern Rock Bank, which obtains or disposes of the money needed to buy the house and that turns this money into bonds; c) the Central Bank, right up to the abstraction known as the U.S. Federal Reserve, the Fed, or its board, the Federal Reserve board.


Each of the Three People on The Scene of The Crisis Represents a Group of Individuals

The second fictional idealization operation, or second hypothesis, will consist of treating each of the three people acting on the scene as an artificial person. Following Hobbes, we will then say that the borrower, the lender and the Central Bank, in this case the Federal Reserve, are all artificial persons and that the words and actions of each are to be considered representative of the words or actions of a group that has become a single [artificial] person, as its members have agreed to being represented by a single individual, such as, for example, Alan Greenspan, CEO from 1987 to January 2006, and thereafter his successor Ben Bernanke of the Federal Reserve, who represents his board of directors.


The Multiplicity of Empirical Objects and the Uniqueness of Abstract Forms

The first of these two idealization operations, of these two hypotheses, allows us to recognize, in an otherwise chaotic cluster of stars, the form of a triangle, of a trapeze, of the Dipper, of Sagittarius, while the second allows us to retrieve the concrete properties of the countable stars we had previously enclosed within an abstract form.


Looking at the Countable Stars of Each Group One by One

We've acknowledged that each of three actors, agents, people, ideal types, on the scene represents a group to which many other individuals also belong. The latter are all very different from one another, but they are all united by a characteristic proper to each type, to each artificial person. The borrower is someone who wants to own a house without having the means to buy one; the lender wants to make money as quickly as possible without being too subtle about it; the Central Bank has the mission to watch over the financial stability of the country and on the operations taking place on the market, in particular to prevent inflation from exceeding the 2% mark.
Going into the details of the characteristics of the three artificial people, the borrower is very rarely a sophisticated individual who has the knowledge to weigh the advantages and the risks of an economic and financial initiative. In most cases he or she is gullible, naive, a dupe, with no steady salary, with a history of unfortunate economic experiences, someone who lacks the tools to understand the complexity of the products he or she is being offered and, above all, someone who has no reserves on which to fall back upon in case something goes wrong.
On the other hand, the lender, perhaps in the shape of a local bank, like the Northern Rock in Britain, is an uncertain artificial person, without a clear cut profession behind it, save the all-embracing one of speculator with nothing to lose, with the sole aim of selling its subprime mortgages, usually at conditions analysts are beginning to call "predatory loans". More precisely, the loans in question have a fixed rate for the first two years but are then mobilized upwards every six or so months. These adjustments are so high that many borrowers cannot afford to pay them and are forced to refinance the mortgages they already took out (these subprime mortgages are then often used to pay debts rather than the purchased house itself) or otherwise forced not to meet their debts, skipping their installment payments and often ending up in the ultimate dramatic situation of trying to sell a house no one wants to buy, or foreclosure, eviction, repossession (see the dramatic report on the NYT of 9.2.07). The lender's loans are also called "predatory" precisely because they are granted on the basis of an evaluation of the house, without taking into account the buyer's actual ability to pay.
Given a scenario with two such well-defined artificial persons like the borrower and the lender, the relationship between the two implicitly appears of the following type: in ethical terms it is a relationship of immoral exploitation; in economic terms one that will lead to the borrower's bankruptcy and, ultimately, the lender's too; in psychological terms it is a perverse addictive sado-masochistic relationship, of the type that ties the dealer to the junky, the people smuggler to the illegal immigrant, the pimp to the prostitute. All the victims idealize the dope, the substance, the place as a mirage they're attracted to without quite knowing what it's all about. The lender, usually with a considerably more fortunate background compared to the borrower, rushes at the opportunity like a predator before a consenting prey.
But, as we've already said, on this scene built according to abstraction, idealization, simplification and selection, as well as the two artificial persons we've so far concentrated on-the borrower and the lender-we also find the artificial person of the Central Bank, in our case the Federal Reserve. By definition, the Federal Reserve's task is to monitor all that happens in the economic and financial field, in particular-in relation to our argument-the transaction of lending or borrowing money and consequently exercising its function as the regulator of bank activities with its practical moves to maintain the inflation rate around or under 2%. Is it according to these dictates of watching and adequate rapid intervention that the Federal Reserve, the Federal Reserve board and Alan Greenspan, who represented them until 2006, behaved? Let's take a look.


When One Fails to See Things Going On Under Wide Open Eyes

The regulators, the Federal Reserve board-members, already began to notice a deterioration in credit standards in late 2003. Indeed, an important Ratings Agency had put one of the main subprime lenders on the credit watch list, expressing concern over their high-risk mortgage business in early 2004. Despite these unmistakable warning signals of looming risk, the Federal Reserve board, and its then president Alan Greenspan, encouraged the development of adjustable rate mortgages, loans with changeable interest rates, which would then turn out to be one of the decisive factors leading to the failure of the mortgages themselves, to foreclosure of insolvent debtors' houses and eviction. In the same way, the press featured economic experts' opinions warning in strong terms about these new adjustable rate mortgages. Then, in December 2005, the Regulators put out a guide to help the more irresponsible mortgage brokers. But even more recently the Regulators' response seemed inadequate. Apart from the fact that they intervened three years after the problem first emerged.
The question that arises is: to what is due this long silence on behalf of the Federal Reserve, this inactivity and paralysis before providing a natural or possible response to the ordeal of the two artificial persons it shares the scene with? How can it be explained? It is inconceivable that the artificial person Federal Reserve had not noticed that something dramatic was going on between the two artificial persons it shared the stage with, the borrower and the lender. It is unthinkable that it had not noticed that house values had first rocketed and then plummeted into the abyss, first with the borrower wanting to buy without any houses being available and then, no longer being able to honor debts, wanting to sell with no one wanting to buy. These peaks and troughs of house prices and mortgage rates has evoked in some economic and financial analysts the analogy with the mood swings characteristic of bipolar manic-depressive illness. The Federal Reserve must have noticed that Edward Gramlich, Fed governor from 1995 to 2005, had warned about a looming crisis in home loans and had petitioned with the legislator in favor of improved consumer protection against predatory brokers, going as far as publishing a book on the subject in June 2007 entitled Subprime Mortgages: America's Latest Boom and Bust. In it he stated point blank that the high-risk mortgages market had become a Wild West of loans granted with no supervision by the Federal Reserve and that the predictable result was carnage. Are we then dealing with a negligent, superficial Federal Reserve? The charge of negligence against the Federal Reserve, if we consider the facts carefully, has not so much to do with the fact that it hadn't noticed what was happening, but rather that it hadn't put into action what was logically necessary to handle the tragedy that was about to hit its world, the stage it shared with the borrower and the lender. One where an unscrupulous amoral or immoral lender, speculator and predator, was trying to strangle the borrower after ensnaring him in a sado-masochistic bond from which the borrower would never again be able to free himself. The artificial person Federal Reserve had found itself before a violent and loathsome scene, a dramatic one full not only of dangers for its two stage companions, but for itself too, insofar as it threatened its own very existence and in particular conjured up the terrifying memory of the cataclysm of the Great Depression, which seemed to be looming about, particularly in the words of Greenspan. And his response was as precise as it was inexplicable: paralysis. Why? We'll try to find an answer to this question by using a further two hypotheses, after the two we previously put forward [the first, regarding the reduction to three persons of all the individuals involved in the mortgage drama; and the second, by which each of the three persons is an artificial person, in the sense that it represents the group that delegates it], based on two analogies, one (therefore, the third) suggested by any animal's reaction when exposed to acute stress, to a life threatening danger; the other (i.e. the fourth) suggested by the crucial events in the history of a child's earliest years, known as the primal scene. Let's have a look at what it's all about.

The "Five-F" Response to Acute Stress: Life Threatening Dangers
As early as 1915, following in Cannon's footsteps, psychologists and ethologists were studying the responses of animals and of the human animal when suddenly faced with a situation of fear and danger, or of, as it was rapidly called, acute stress [a term introduced to the psychological sphere by Hans Selye, who then popularized it in Italy during a cycle of conferences in the mid '50s]. The first two responses to acute stress to be isolated were fight, 'attack', and flight, 'escape'. Cannon's initial research expanded from scenarios strictly related to war (from certain crucial WWII episodes like the D-Day landings in Normandy, to the Korean, Vietnam, and Gulf Wars) to people exposed to extreme traumas, such as individual or group rape, natural catastrophes, or terrorist attacks. After these studies the two <Fs> became the five <Fs>.


The Federal Reserve's Response to the Acute Stress of the Subprime Mortgage Financial Crisis

The Federal Reserve's response, characterized, as we've seen, in the phenomenological sense, by silence, immobilization, negligence, by letting things happen without intervening, ultimately by paralysis, would seem to fit, according to the five <Fs> response filter, the freeze category, that of frosted emotions and actions, of playing dead, like the U.S. marine who at the D-Day landing, under German artillery fire, squats on the ground, almost merging into the wreckage so as not to see or be seen. After our first hypothesis (that of simplification and reduction of all the individuals involved in the crisis to just three artificial persons: lender[;], borrower[;], Federal Reserve) and after the second (the extension of the artificial person to a whole group of individuals who elected it as its representative), our third hypothesis (according to which the Federal Reserve's response of paralysis to the mortgage crisis, which fits one of the five modes of reaction of the biological and human individual to acute stress) has the advantage of leading us from the world of immediate phenomenal observation data (defined by explicit conscience, from the world of the know that) to the world of implicit causal knowledge (that of the know why). If the that of explicit knowledge was the paralysis of the Bank, the why of implicit knowledge is the very Bank's fear, the terror before a life threatening danger, one that can grip any biological individual, including a natural person or an artificial one such as the representative of a group.


The Primal Scene

In this movement of systoles and diastoles made by our hypotheses, of reduction and extension, ultimately from the particular to the universal and back again, from the individual to the group and vice versa, let's move on to specifying, with a fourth hypothesis, the generic fear the Federal Reserve shares with any animal trapped in vital stress, tracing it back to the prototypal trauma a child is exposed to at the most tender of ages, between two and four; what psychoanalysis formulates in terms of "primal scene".

The Primal Scene in psychoanalysis is the representation a child builds for himself of the sexual intercourse between his parents, whether witnessed or imagined, behind open or closed doors. The primal scene event immediately appears to the young spectator as a terrifying enigma arousing an inextricable mixture of sexual tension and fear.

The crucial element around which the form of the primal scene arranges itself is generally an open or closed door, or a window. Consider Hitchcock's Rear Window or, to take a recent Italian example, Dario Argento's Do you like Hitchcock? In the mortgage crisis three-character scene, the door is the one dividing the two functions of borrower and lender, on the one hand, and that of the Federal Reserve on the other.
On our analogical map we put the borrower and the lender in the place of parents who both find the diagnosis of dependent personality disorder rather convenient(3); with the lender in the role of the sadistic and sadomasochistic personality disorder(4) and the borrower in the role of the self-destructive masochistic personality disorder(5). On the scene of the crisis the perverse parents, borrower and lender, are so totally involved in their actions of mutual abuse that all they see is the consequences on each other of their actions. In the same scene, on the other side of the door, stands the Federal Reserve, in its role as the perverse couple's young daughter, so absorbed in her role as watcher-as voyeuse, observer, first row spectator of the incredible violent tyrannical actions her parents are engaging in before her large wide open eyes, mocking her terror-that she can't see the slightest glimmer of hope of shaking herself free from her paralysis.

The Fifth Hypothesis: The Persistence of the First Response to the Original Trauma.

The last hypothesis, the fifth, to help us better understand the Federal Reserve's response as an artificial person in the years 2000-2006, is to adopt the persistence axiom:

(1) Kj_ -----‡ [Fj] Kj_

which we read as follows: "if agent j knows proposition _, then, even after any given number of actions it undertakes [Fj], it will continue to know the same proposition _". In other words, from the persistence axiom we derive the following: if in the years 2000-2006 the Federal Reserve adopted the paralyzing freeze response when faced with the trauma of the mortgage crisis, it means that this was a repetition, a persistance, of a prototypal response already given by the same Federal Reserve when exposed to the original trauma of the primal scene. But how can we translate this proposition so that it makes any sense? Thus: if Alan Greenspan, now taken as a natural person [not as an artificial one representing the Federal reserve], responded by adopting the paralyzing freeze, this means that at the tender age between two and three, when he was exposed to the trauma of the primal scene, he reacted by adopting the freeze <f>, that of paralysis, which he would then repeat throughout his life, according to the persistence axiom, including the period we're concerned with, between 2000 and 2006. Focusing on Alan Greenspan-the natural person, not the artificial one-let's consider the following: The Great Depression of 1929 was characterized by stagnation and deflation (the opposite of the bubble and froth of inflation), which Alan Greenspan always considered the evil spirit to be exorcized from US economy. But in 1929. Alan Greenspan was three years old, the age when a child is first exposed to the trauma of the primal scene. If we follow the reciprocity of the persistence rule, Alan Greenspan most probably responded with paralysis to the trauma of the primal scene, which for young Alan established The Age of Paralysis. The terror experienced by Alan when faced with the primal scene persisted throughout his entire life as a natural and artificial adult person (in particular conditioning the Federal Reserve's non-response to the mortgage crisis) by finding an arcane multiplier in the coincidence of a parallel with the terror of the Great Depression, something to avoid at all costs, even by curling up in the freeze of paralysis, something his successor Ben Bernanke would cut with a Saint George's sword on September 18.


Bibliography

For the concept of Primal Scene see:
Freud, S. "From the History of an Infantile Neurosis (The Wolf Man)". S.E. 17.

See also, among many others, two films drawing heavily on the tale of the Primal Scene:

Hitchcock, A. (1954) Rear Window.

Argento, D. (2005) Le piace Hitchcock?

For the pair of terms fight flight to describe animal responses to serious threats see first of all Cannon, then the more recent Grey:
Cannon, W. (1915) Bodily Changes in Pain, Hunger, Fear and Rage: An Account of Recent Researches into the Function of Emotional Excitement (New York: Appleton).
Grey, J.A. (1988) The Psychology of Fear and Stress. 2° Ed. (Cambridge: Cambridge University Press).
For the diagnoses of "dependent personality disorder", "sadistic and sadomasochistic personality disorder" and "self-destructive masochistic personality disorder", see:

PDM Task Force (2006) Psychodynamic Diagnostic Manual (PDM) (Silver Spring, MD: Alliance of Psychoanalytical Organizations) http://www.pdm1.org

For the concept of basic response to fear, see:

Minervino, A. (2007) Il panico di profilo (Livorno: MB&CARE).

For the notion of memories trapped in the body, in panic attacks, as a basic response to fear, see:

Greco Scribani, V. (2007) Le memorie prigioniere del corpo nei disturbi dissociativi. Thesis.

For the notions of implicit knowledge, explicit knowledge, awareness, see:

Fagin, R. & Halpern, J.H. (1988) "Belief, awareness and limited reasoning", Artificial Intelligence, 34: 39-76.

Levesque, H. (1984) "A logic of implicit and explicit belief", Proceedings AAAI-84 (Austin, TX), pp. 198-202.

For the notions of free market, laissez-faire and liberalism, see:

Friedman, M. & Friedman, R.D. (1980) Free to Choose: A Personal Statement (New York: Harcourt Brace Jovanovich).

On Alan Greenspan's thinking, according to which we are living in a new world, a global capitalist economy far more flexible, stronger, with a far greater capacity for recovery, opening up, self-correction and with much more rapid changes than even a quarter of a century ago, see:

Greenspan, A. (2007) The Age of Turbulence. Adventures in a New World (London: Penguin Books).


Notes:
1 Paper presented at the SIP (Italian Psychology Association) National Conference: GRUPPI: Psicologia di una società plurale, Rome, 21-22 November 2007.
2 Psychoanalyst and conversationalist, Full Member of the Swiss Psychoanalytical Society and of the International Psychoanalytical Association (IPA), director of the journal «Tecniche conversazionali» on line, www.tecnicheconversazionali.it
3 PDM, P109
4 PDM, P105
5 PDM, P106