Is money at the individual level and economics at the larger level based on rational or emotional thought? Most economists claim that the market and people’s money decisions are based on rational calculations that will help their financial situation. The larger market is guided by this “invisible hand” as Adam Smith called it whereby the forces of supply and demand are all that matter.
The balance between fear and greed is like yin and yang
This may be the case in a vacuum where there are no humans present. However, what we really see in action is a dynamic play between fear and greed. More than supply and demand, fear and greed determine the market actions and the financial decisions of individuals (which make up the larger market). Money is intimately tied to our emotional sectors of the brain because it is what we use to survive in this day and age (you can buy all your needs and desires with it : food, shelter, water, even sex).
This tug-of-war between fear and greed is exactly what happens at a casino when gambling. When you make a bet, you are doing so because of your greed -you want to walk out of there rich! You are dreaming of what you could do with millions of dollars. When you are “up” and winning you want to continue whatever it is you have been doing even if you KNOW deep down (rationally calculated) that the odds are stacked against you. (Having said that, most people have no idea what the true odds are of various games they are playing -including outside of the casino.) When you start losing, your fear kicks in. You want to make more than you started with -which is your greed, but you also don’t want to lose everything -your fear. Fear is what makes it so that you don’t lose ALL of your money and start betting your house or all the credit on your credit cards.
Sound familiar? This same type of thing happens all the time in the market, especially in ones that are designed just like a casino -the stock market for example! But really, any item can be pushed into a bubble because of the greed side of emotions and just as quickly can pop when someone calls the bluff and refuses to pay anymore.
If economics were a simple system of supply and demand, we would never have had more houses or cars or whatever than we needed. The demand was fabricated out of a desire for money-greed. And so the supply met that false demand. When the false demand finally came to be noticed, everything crashed and there was far too much supply.
So while supply and demand play a large role in economics, it’s not always driven by a rational desire for the products or services (demand). Generally speaking greed leads people to make, sell and broker more and more for as long as possible. When it becomes obvious that they will not be able to anymore for whatever reason (making a dangerous product that will be recalled, selling products during a bubble, legal issues, the trends change and demand is not there anymore) fear then leads people to want to get out quick, to save and to hoard.
And so this is the way the cycles of our economy play out. During the greedy bull times, people are buying and selling. People are spending. Times look great. But during the fearful bear times, people are saving. People want security. From the market’s point of view, nothing is happening. So the Federal Reserve and government in all its esteemed glory (??!) decide they need to kick start people out of the fear emotion by pouring in more money, bailing out failing and corrupt companies and otherwise encouraging spending.
But it’s not spending that people need to do when that is what caused the problem in the first place. Overconsumption and greed is not cured with more overconsumption and greed (no more than gambling loses are cured by more gambling). People spend money when times are good, but it isn’t the spending that makes the economy good; the economy is sound, so people feel safe and secure and are willing to let go of their money more freely.
The economy is NOT safe and secure right now, so we should be encouraging saving, frugality and thrift! Saving is exactly what we need to do in order to get out of this mess in the first place. Not add another zero to our national deficit!
The opposing actions of greed and fear are necessary to regulate the market just as supply and demand are. The current policies are trying to take fear out of the equation, and that not only WON’T work, but it SHOULDN’T. When people go into a casino with no fear of losing their money, they are much more likely to lose all of it. There is no mechanism to put the brakes on spending/gambling.
We need to allow and actually encourage people to save. Once we have enough savings and the economy is indeed “safe” with “savings” people will spend money again. And in the mean time spending won’t stop completely; people still need to buy things to live, they are just being careful.
So how does savings lead to a strong economy? Well, when people have a large savings, they are more likely to take a risk, make an investment and so on because they feel more secure and less fearful. They see the chance to make their savings worth more (greed kicks in). And they have the reserves to cover any problems. They will still be able to eat and live if the gamble doesn’t pay off. And as more people do this, the economy will slowly come back to life. The savings will be tied to the saved or “reserved” productivity of our people, like a silo of grain would be.
Savings are not only a key component to individual personal finance, but should be a key component to any nation. It seems outrageous to me to think about an individual just living on credit card debt without ever paying it down. But even more outrageous would be to go on shopping sprees when you are in massive debt! But that is exactly what the U.S. is doing right now. We need to pay it down, cut back and save! We need to stop the spending. We need to save so that we feel secure and safe when we do spend. We have plenty of greed, we need to learn to get our fear back.
The shopoholic, bankrupt gambler, alcoholic, drug addict and other people who have lost the ability for moderation also lost their fear of the repercussions of their actions. If the U.S. is known for anything, it is not our moderation, but rather to the contrary. It is only until we allow and encourage the moderating forces to balance themselves out that we will be on more stable footing.
Great blog entry.
The big mistake was Bush II bailing out the banks. If the big banks went under, we would have had a ‘re-setting’ of the economy. Now we have a very unbalanced economy. Big banks can create risk without fear of loss. We all pay for it,by having to live with their finance rules. Maybe I am just ticked off because for fun I applied for a 2nd credit card and was turned down because I have no debt, and therefore I am not going to make Capital One any revenue on late fees!
Wil,
Citicards effectively canceled my card because I put a VERY small amount on it each month (like $10 for a lunch or something) and paid it off each month. It was a cashback card, so I was making a small amount back each year on it and that’s why I kept it. It had a huge limit ($10,000) which was also great for my credit/debt ratio and no annual fee. They told me I had to spend more on it per month or they would start charging me a $60 annual fee, or I could cancel. So it’s canceled. They were trying to encourage me to spend, sounds familiar…
It ticks me off too! When people do the right thing, they don’t get any “credit” -ha- but when they screw up big time, they get bailed out! Bush W started it, but Obama and Pelosi didn’t help matters but pushing all the bailouts for AIG, big banks, GM etc through. We voted them in to fix this, not make it worse! I know Obama just inherited the mess, but I don’t think continuing the same way is very smart.
Let them fail, keep fear in the equation of business. New innovation and better practices will grow where the others fell behind. Sometimes medicine tastes bad. At least like you said we would have “reset” and started with some ground under our feet. Instead we are just pushing out the inevitable when China calls our debts due. When that happens it will either be a massive depression or war because we can’t pay it back (printing more fake money only works for so long). And knowing our history, of these choices, it will probably be war. After all, 1/2 of our debt is obligated to the military, right?
I agree with your idea that this financial mess was created by greed and over consumption, largely encouraged by the fed and politicians, but also the stupidity and avarice of a lot of people kept it going. However, it wasn’t just the “.. shopoholic, bankrupt gambler, alcoholic, drug addict and other people who have lost the ability for moderation also lost their fear of the repercussions of their actions” who got into trouble.
We’ve seen hard working people buy a home they can afford, lose their job and everything else; students who borrowed too much, thinking that a job would be there, and it wasn’t; retirees who thought their 401 k’s, put together over a lifetime, would be an ample supplement to their incomes after they left the working years, then the stocks crashed — the stories go on and on.
It’s true that Americans should have realized that we were on a roller coaster to nowhere with this borrowing, but when your own government promotes an irrational and dangerous economic system, many innocents were caught in the trap along with the “greedy”.
I also thought the fed should have let the banks and Wall Street fail. The “bailout” could have allowed bank takeovers to protect insured savings only. As you have posted before, the big financial industries and corporations have long ruled Washington, so they weren’t going to let themselves fail; in fact they probably planned it to happen exactly as it did. We know the economy was faltering in early 2008, but they waited until September 2009, with a lame duck president and a looming election, to let the system collapse. This was no accident.
What I see happening is a slight sea change in consciousness (but very slow) about what and who are the threats to the middle class. The BP mess is showing what many corporations do best, make money at the expense of the most of us,no matter the consequences. Recent threats to Social Security (the financial industry wants it privatized to they can collect more commissions off of retiree investments, especially now that 401 ks and Wall Street are in disrepute) will further encourage middle class awareness.
Change takes time; smart folks will capitalize on this uncertainty and make appropriate moves to positions themselves for the future.
Annie, I was just using the shopoholic or any version of an addict as an example of what happens when there is no fear in the equation. The normal warning signs and stopping points that occur when you are scared have been removed and so it (whatever addiction) spins horribly out of control. I think most people are at least somewhat conscientious. I think that is why even though the government continues to tell us to spend, spend, spend people are actually saving a little more! Just imagine if we were actually encouraged by the powers that be to save instead! It would take a while to get out of all this debt and mess, but it would be the way it needs to happen. Then we would be in solid shape for a strong comeback.
It is sad that all the normal people get caught in the whirlwind of government/corporate corruption and get taken down. Because the rich don’t fall they let all the regular non-billionaire people.
Wouldn’t it be something if it had been planned…I often think about all the money that just POOF was gone after the crash. But it went somewhere. It went from all the 401(k)s, main street houses, and promises of high-paying jobs -straight into the pockets of those very corporations that should have failed.
There are always opportunities in challenges. The housing market crash has made it so that buying houses is once again affordable, especially for people who know how to save in a world where saving is laughed at. If interest rates weren’t artificially low, it would be an even bigger extravaganza for the savers among us that don’t need to get money through the credit (loan) market.
Ah, BP. Perfect example of how screwed up things are. I believe the cleanup is making the same amount of toxic waste as the original gush – they are putting a couple teeny tiny tar balls into giant plastic bags, and will chuck those and all the oily booms into the ground probably close to the shore. They still want oil drilling though – probably more than fisheries. They are probably getting more dollars into the states because of all the media needing food, shelter etc. Then a judge says keep doing it the same way? Lift the “let’s rethink things” ban? crazy. All this balancing and weighing of things is like the same decision making on when or whether or not to make life changes. The time is never right for quiting jobs, selling houses, cashing in IRAs, putting money into IRAs, reconsidering how we do anything.You hate your job but you’ve done it so long it doesn’t pay to change it and if you leave you can’t go back into the professional. That “stuck” feeling. Change is hard and that’s why nothing changes. Who will the next president be? I want a new non-political party called the “regulars” made of reasonable people who have a different perspective on things. Maybe a party of people from other places where excess wasn’t the rule of the land.
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