Sunday, November 30, 2008

"Safe As Houses:" A Psychoeconomic Reflection

There's a relationship between economics and psychology.  A lot of human behavior often has an economic motivation, although it's often concealed, sometimes from the person doing the behaving.  I address that in a question in the Q and A archive on my website,, where I see psychoeconomic issues figuring powerfully, if without acknowledgement, in the marital issues of a questioner.  Similarly, a lot of economics looks to me like a branch of psychology, because it's about human nature, what people believe and how we behave.  

The current economic crisis is a psychoeconomic case study worth our reflection, because I think we are looking at a case of the removal of trust from human relationships, and the elevation of greed in the absence of context to a dominant position in our national economic life.  For these two psychoeconomic dynamics, we are paying the price. 

There is a spectrum of trust in economic relationships. 

Let's think about credit, which is at the center of this crisis.  If I ask you for a loan, and you give it to me at a rate of interest that I can pay, you can accept, and we can agree on, we have a relationship in that loan.  You have evaluated my ability to repay.  I want to keep my reputation as credit-worthy.  We will both have probably assessed the risk that I might not be able to pay back the note, and found it worth taking.  Probably I will pay you back.  If I can't you can live with it.  Maybe I put something up for collateral.     

Now, if we think about a traditional home mortgage, a bank is making a significant multi-year commitment to a borrower who promises to pay back the note, and in whom the bank has a reasonable basis for trusting that he will.  We are moving up the spectrum of trust from person-to-person relationship to person-to-institution relationships.  But it is still between the borrower and the lender, for the duration of the loan.  It is a relationship of trust that is direct and effectively interpersonal, albeit at one remove.  Having made the loan, the bank still carries it.  Someone, or some group, at the bank decided to make that loan, and they are probably going to be around.  Their own reputation among their colleagues at the bank depends in part on the performance of that loan.  The well being of all the depositors and investors in the bank even depends, in some small way, on the performance of that loan.  There is a long-term relationship among the people involved in that loan.  

Then we have Fannie and Freddie, buying mortgages from banks in order to stimulate the mortgage market.  It seems to have been an idea that worked, for many years, as long as banks made loans for sale to federal agencies by the same standards that they would apply if they had to hold the mortgages themselves.  The relationship of trust between borrower and lender was effectively maintained, albeit at another remove when it was passed onto the federal agency.  It became part of the relationship between the federal agencies and the banks that made mortgages.  The line of financial relationship was longer, it was extended, but it hadn't snapped.  It remained intact.  

The bubble in the mortgage market removed that financial relationship between borrower and lender, because lenders could sell mortgages for quick profit immediately after closing the deal, and borrowers could apply for mortgages that they couldn't repay with the expectation that they could always refinance later, when their homes would be even more valuable. Under such circumstances, the incentive in the mortgage market was just to make and sell as many mortgages as one could.  There was no longer a relationship of trust; it was gone.  In it's place was greed:  the greed of unqualified home buyers to purchase homes they couldn't really afford, and the greed of the mortgage seller for a quick profit.  

Now we come to the interesting term "securitization."  This involves bundling mortgages together into financial investment instruments purchased by investors and insured against default by insurers such as AIG.  The economic rationale in bundling mortgages into securities was that most mortgages would be repaid even though some would fail, and the majority of successful notes would compensate for the small minority of failures within the security.  This worked well as long as the original mortgages were based on relationships of trust.  It was based on expected ratios of home mortgage payoff to failure that were typical of mortgages made in the traditional, fixed rate, long-term, more or less interpersonal way.  But such ratio estimates did not apply to the new short-term adjustable make-and-flip mortgages which were comprising an increasingly large proportion of the mortgage market.  Similarly, the security insurer (such as AIG) made its insurance against default on the basis of an expected rate of failure that characterized securities with much more fundamental validity than these new instruments.  My impression is that default insurance hardly ever had to be paid, because the instruments rarely defaulted; they were, as the saying goes, "safe as houses."  This expectation was seemingly borne out by the bestowing of triple A rating on the securitized mortgage instruments.  This is another example of greed for gain in the absence of relationships of trust; with the statistics involved in bundling the mortgages together, and a belief--astonishing in financial professionals--that the values of housing stock would always move upward without correction, substituting for relationships of trust in the mortgages themselves.  

So the psychoeconomic line from an economy based on relationships and trust to an economy based on greed without relationship or trust was crossed when the relationship between borrower and lender was effectively nullified.  The borrower no longer had an obligation to pay off the note as made,, based on the assumption that housing value would continue to increase and new mortgages at favorable terms would always be available whenever the note came due.  The lender no longer had an obligation to hold the note for the loan, because it would be instantly flipped into a securitized bundle.  When houses and mortgages could be bought and flipped, there was no foundation of relationships and trust to support the economy any longer, and it wasn't a matter of whether the system would collapse, but of how long it could keep going until it did.     

Another dynamic of greed fueling the bubble was the existence of large amounts of investor wealth, both in the U.S..A. and internationally, looking for opportunities for high rates of return.  With the bestowal of triple A rating, and in the presence of default insurance, the elements of an economic "perfect storm" all came together.  

Reflecting on the unrealistic thinking that went into creating this mess, I'm reminded of the story of Mulla Nasrudin, the Sufi wise-fool star of hundreds of jokes and tales, who was observed by his friend one day, pouring yogurt into a lake.  When his friend asked him what he was doing, Nasrudin said, "I'm making yogurt."  "But you can't make yogurt that way, Nasrudin!" exclaimed his friend.  "Yes," replied Nasrudin, "but just suppose it takes!"  (See, "The Exploits of the Incomparable Mulla Nasrudin and The Subtleties of the Inimitable Mulla Nasrudin," a double book, by Idries Shah, available at I.S.H.K. Book Service,




Sunday, November 9, 2008

Inappropriate Stimulant Use for Misdiagnosed A.D.H.D. Can Contribute to Psychosis

A very bright young man whose evaluation I recently completed sent me information that he'd found, on psychiatryonline, that he thought might be useful for others, so I'm posting it here.  (His encouragement to write a blog contributed to my beginning this one.)  He had suffered a psychotic episode in college after using stimulants for A.D.H.D.; though stimulants were not the only factor contributing to the psychotic episode in his case.  My evaluation indicated that his attention problems were part of his cognitive learning style, a kind of nonverbal learning disorder, and not really due to A.D.H.D.  The stimulants had only helped him as they would help anyone who took them, and his dependence on them contributed toward tipping him into a psychotic episode that he is still working his way out of.  Here's what he sent:   

"This case has some similarities to my situation."

"Stimulant use to treat attention deficit disorder and stimulant misuse to aid studying has dramatically increased in recent years among college students.  A phenomenon we have observed is the use of stimulants during the schizophreniaprodrome for presumed attention deficit disorder or attentional difficulties in the absence of any childhood attention deficit disorder.  The following case typifies this presentation, which we have seen several times over the past 2 years in our First Episode and Early Psychosis Program.

"Mr. A," a 20 year old man, with normal childhood development and no behavioral or academic problems, graduated high school with honors despite regular marijuana use.  During his sophomore year, he suddenly found it difficult to concentrate and demonstrated difficulty keeping up with his course work.  these difficulties prompted him to try a friend's prescription stimulant Adderall, which he found effective and continued to use it intermittently without a prescription for "cramming."  Several months after starting Adderall, he became acutely psychotic after smoking phencyclidine-laced cannabis at a party.  He required a lengthy hospitalization but was eventually stabilized and treated with aripiprazole 10mg/daily.  His request for stimulants "to concentrate better" was resisted, and after 6 months of treatment with aripiprazole, he made a full symptomatic and functional recovery without any objective or subjective residual psychotic or cognitive symptoms.  His provisional diagnosis of schizophrenia was confirmed when he had a psychotic relapse 3 months after discontinuing his maintenance antipsychotic aripiprazole following 1 year of treatment. (italics added to identify case presentation)

The prodrome of schizophrenia is characterized by nonspecific symptoms that include cognitive problems, often characterized by patients as "difficulties concentrating."  The construct of "basic symptoms" attempts to capture these nonpsychotic, subjective cognitive problems that begin during the prodrome and might presage the onset of psychosis.  Two basic symptoms that would lead to a complaint of "difficulties concentrating" are thought interference (the intrusion of often banal thoughts) and disturbances of receptive language (problems with the meaning of words).  Both are of particular interest because of their potential as specific predictors of schizophrenia.  

College students who present for treatment with self-diagnosed "pseudo-attention deficit disorder" should be asked about misuse of stimulants and followed closely, since a small percentage will be in the early phases of schizophrenia.  Although the impact of stimulants on the course of schizophrenia is not known, sensitization has been described with stimulants, raising the possibility that stimulant use is a risk factor for some cases of schizophrenia."

This observation, from psychiatryonline, indicates both that some attention problems that look like attention deficit might be early indications of schizophrenia, and that misuse of stimulants, especially together with use of hallucinogenic (or other recreational) drugs, might conduce toward psychosis in certain individuals.  

This information is important to consider in light of the widespread practice of prescribing stimulants for individuals with attention problems without either taking a detailed and fairly thorough case history, or having the opportunity to review the results of psychological testing that might indicate the presence of cognitive patterns that explain the attention problems in other ways than as a result of hyperactivity.  In my evaluations, I typically spend an hour or more taking a case history from a patient--sometimes several hours over parts of several sessions--and an hour and a half taking a developmental case history from the parents if they are available; and that's not including perhaps 10 or more hours of testing.  The current standard of practice for prescription of stimulants is a single medical interview, often not even lasting an hour.   

While we don't have any test that will objectively confirm the existence of attention deficit disorder, a fairly thorough case history and the results of a fairly comprehensive battery of psychological tests can provide a much more informed basis for clinical judgment. 

It's important to remember that stimulants will help most people to concentrate better at first, so the fact that a patient reporting attention problems concentrates better after beginning stimulant treatment by no means indicates that the problem was attention deficit disorder.  Stimulants are in demand on college campuses for exactly that reason, especially at exam time.  It has long been known that stimulant abuse is associated with an increase in paranoid symptoms, especially when used on a long term basis, and more recently stimulants have been observed to exacerbate bipolar symptoms in patients who had hypomanic or cyclic tendencies before beginning the stimulant.  Now we see that stimulant abuse may also be associated with  psychosis.  

This doesn't mean that stimulants aren't very useful, even sometimes necessary, for patients with the kind of attention disorders for which they can really make a great deal of difference.  It means that the prescription of stimulants for attention disorder should follow a much more detailed and thorough assessment than is current in general practice.  

I hope that my former evaluatee's research, part of his path of recovery on his own personal journey, will help others to avoid this particular pitfall of medication misuse.  I know he hopes for that as well.