Sunday, November 22, 2009

Balance Denial Syndrome: The Tranquilizing Effect Of Not Knowing

This blogger is a paragon of financial avoidance. In a corner of the room is a big filebox that contains all manner of financial papers and they just lie there a-mouldering in the box. If this is (fair & balanced) fiscal irresponsibility, so be it.

[x NY Fishwrap]
Avoidance By The Numbers
By Jacob Soll

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Among the reforms approved by the House Financial Services Committee on Thursday was an amendment allowing a systematic risk council to suggest new regulations on financial and corporate accounting. New regulations are all well and good, but why haven’t we been able to master the excellent rules of bookkeeping we’ve had for centuries? The answer may be as much a matter of psychology as economics: the fear of bad news often leads to bad accounting.

I myself was reduced to a nervous wreck last April trying to figure out my taxes, even though I had just finished writing a study of the history of accounting. As I waited in my accountant’s office, I realized why I had lost sleep the night before: for the first time in a year, I had to make a reckoning not just of my place in the financial meltdown, but also in my own economic universe; my successes, failures and ultimate weaknesses. I had spent too long off the books, and I couldn’t face it.

A 2005 study by Lloyds Trustee Savings Bank of Britain showed that accounting anxiety has led to “balance denial syndrome,” in which bank customers so fear being in the red that they systematically ignore their bank statements. It is both a consolation, but also a terrifying fact that those who are terrible at keeping accounts are not alone. Over the centuries, monarchs, merchants and housewives have all faced the same problems that companies like Lehman Brothers and A.I.G. confronted this past year — and too often, they have kept bad books and gone bankrupt.

Early pioneers of financial management recognized the inherent anxiety brought on by keeping account books. In the late Middle Ages and Renaissance, accountants received training in family firms that required monk-like self-discipline. In a 1494 treatise, Luca Pacioli of Venice first explained the basic principle of double-entry bookkeeping: the separate calculations of the sums of credits and debits had to equal the final account of capital. Pacioli described how merchants lived with the constant tension of having to record all the day’s transactions in a journal, and then rigorously put them into a ledger. Only a trained mathematician could do this, he warned, for it took mental stamina.

Pacioli’s work circulated widely in Europe in the 16th century. Nonetheless, merchants and governments were slow to adopt good accounting practices. In 1593, the Dutch mathematician Simon Stevin tried to teach Prince Maurice of Nassau the art of bookkeeping. Maurice revealed a rare glimpse of princely fallibility in asking why accounting was so difficult to understand.

Anxiety and fear often undermined the adoption of sound bookkeeping at the highest levels of government. Louis XIV’s famous finance minister, Jean-Baptiste Colbert, was the first professional accountant to take over the administration of a large state. In 1673, he designed a commerce law that required all merchants to keep double-entry books and to sign off on them in the presence of a state auditor.

Colbert also taught basic double-entry bookkeeping to his son, the Marquis de Seignelay, and to Louis XIV himself. In all cases he failed. The merchants resisted the government auditing their accounts. More revealing is that despite decades of rigorous training, Colbert’s son was unable to keep his account books in order. Given to fits of nervousness, Seignelay did not have the discipline — or the courage — of his father.

The Sun King eventually had the same reaction to keeping accounts. For 20 years, Colbert made miniature ledgers that Louis kept in his pockets. But as the building of Versailles and the maintenance of his army and navy during his wars against Holland and Spain strained the royal finances to the point of collapse, Louis stopped keeping the ledgers. He chose not to face his own poor financial management. By the time Louis died in 1715, public debt was nine times the annual royal revenue.

In the 17th century, Samuel Pepys, the secretary to the British Admiralty, wrote his famous diary every day while at the same sitting balancing his personal and state account books. They were related activities of the reckoning of each day, and Pepys, who regarded those who did not keep their own books as madmen, found catharsis in this virtuous and disciplined activity. Likewise, in The Gentleman Accomptant (1714), Roger North wrote that to keep well-balanced books, with the demands and satisfactions of absolute honesty, was to love life.

By the 18th century, families, even children, increasingly kept household diaries full of carefully detailed expenditures. Women often played the leading role, although many husbands insisted on signing off on their wives’ books. But just as financial strife often led to domestic strife, marital turmoil and personal drama could lead to bad and even fraudulent accounting. After all, household account entries, faithfully kept, could be a reminder of the deteriorating state of a family’s fortune, or of a family.

In 1868, Louisa May Alcott’s Little Women illustrated how bookkeeping not only brought stress upon a poor couple, Meg and John, but also reflected larger problems in their marriage: “Till now she had done well, been prudent and exact, kept her little account books neatly, and showed them to him monthly, without fear. But that autumn the serpent got into Meg’s paradise, and tempted her, not with apples, but with dress.” Meg lived in real fear of the moment when John would find those books and discover her secret spending. It’s a precursor to the dread we now feel when an unwelcome credit card bill arrives, knowing that it will reveal too many impulse buys, too many irresponsible expenditures.

Over this past year, many have had to account for failing investments, real estate and 401(k)’s, as well as risky home loans and reckless credit card debt. But this meltdown has been more than an economic failure; it was brought on by our collective addiction to the thrill of unnecessary risk, to the frisson of financial anxiety, the tranquilizing effect of not knowing. It might be that the first step to balancing the books is finding the courage to face keeping them. Ω

[Jacob Soll, an associate professor of history at Rutgers University, is the author of The Information Master: Jean-Baptiste Colbert’s Secret State Intelligence System (2009). He received a BA from the University of Iowa, a Diplôme d'Études Approfondies from the École des Hautes Études en Sciences Sociales in Paris, and a Ph.D. from Magdalene College, Cambridge. Soll is a John Simon Guggenheim Memorial Foundation Fellow in 2009.]

Copyright © 2009 The New York Times Company

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