July 13, 2008
Psychosomatically Out of Gas

Isn’t a rudimentary knowledge of the economy required to become a Professor of Business? Well, I suppose it depends on your definition of “knowledge”.

No doubt you got a chuckle out of Phil Gramm’s recent diagnosis of our current financial troubles. After all, the guy credited with such classics as “Has anyone ever noticed that we live in the only country in the world where all the poor people are fat?” and “I have as many guns as I need, but I don’t have as many guns as I want” is bound to have something pithy to contribute.

Sure enough, Gramm thinks it’s all in our heads: “You’ve heard of mental depression; this is a mental recession”, and “We have sort of become a nation of whiners, you just hear this constant whining, complaining about a loss of competitiveness, America in decline.”

John McCain clearly enjoyed the performance as much as you did.

But there’s apparently a non-zero constituency for the idea that gas is only nearing $5 a gallon in our heads.

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“I think the way consumers feel about things is very emotional,” [consumer psychologist Kit] Yarrow told “Good Morning America” today. “Those emotions are trumping reality, creating a snowball, which makes the economy worse. It’s not as bad as consumers feel like it is.”

Yarrow, who is also the Russell T. Sharpe Professor of Business at Golden Gate University, says that lack of consumer confidence has been caused by an negative overreaction to recent economic trends.

“We’ve had great prosperity for the last few years,” Yarrow said. “We had very cheap gas. We’ve had a lot of increase in our home values. We’ve had it really pretty good as the stock market increases. Emotion is always caused by this mismatch between what we perceive and reality. It’s really emotion, the psychology, that’s contributing to our economy right now in a negative way.”

Right, it’s not the foreclosures. There are only projected to be two million families losing their homes over the next two years; and most people won’t be among the 40 million whose homes are projected to lose value. The odds are 5-1 against you being in either of those groups, though of course you’re competing with non-players in the housing market like infants and the imprisoned.

It’s true that IndyMac, which was nationalized on Friday, was “the largest regulated thrift to fail and the second largest financial institution to close in U.S. history”. And that the FDIC estimates the cost to the taxpayers at between $4 billion and $8 billion. And that people are now worrying about mortgage finance companies Fannie Mae and Freddie Mac. And that 300 more banks might fail in the next three years.

But the real problems are not structural, they’re emotional. If consumers will just continue spending more than they take in, the Phil Gramms and Kit Yarrows will be fine.

In the end, Gramm states his position rather clearly.

“I think we’ve become entitled to a sense that we’re going to have continued prosperity, and if we hadn’t had it good for so long, I don’t think there would be this level of emotion that’s causing us to draw back on our spending,” [Yarrow] said. “We expect great growth. Any sort of normal growth is considered a catastrophe now.”

Yarrow told “Good Morning America” that this overreaction could be caused, in part, by the media and the preponderance of the term “crisis.”

“It’s described in anecdotal terms, as well,” Yarrow said, “which causes consumers to be especially fearful.”

In an interview with the Washington Times this week, Gramm agreed.

“We’ve never been more dominant; we’ve never had more natural advantages than we have today. … Misery sells newspapers,” he said. “Thank God the economy is not as bad as you read in the newspaper every day.”

If you’re struck by the gap between reality and Gramm’s “we’ve never been more dominant”, you might try interpreting “we” to mean Gramm’s social circle, whose dominance over us lesser Americans is indeed near the historic peak. An intelligent person recognizes that historic peaks are rarely maintained. Just as historically low interest rates are likely to rise after you sign that ARM, historic peaks of power precede historic diminishments.

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Posted by Chuck Dupree at July 13, 2008 07:27 PM
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Comments

Yeah, my sister, your typical middle-class whiner, was chuckling as she waited over two hours in line, flanked by armed guards, to get a number to be on a waiting list so that she could receive claim forms. My bank's stocks dropped 31% today and I'm sure within the week it will be down. f**k you gramm.

Posted by: floater on July 15, 2008 1:11 AM
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