Is the Recession Causing Depression?

Jul 29 2008 | Comments 3

U.S. News & World Report featured an interview with a behavioral economist yesterday, to try to figure out why consumers are feeling so blue. I never knew behavioral economists existed, but Dan Ariely (pictured) has some interesting things to say to Rick Newman about the psychology being somewhat broke.

Why are consumers so gloomy even though the economy, by traditional measures, isn’t all that bad? Is it $4 gas? Or falling home values? Or something else altogether?

I think there are three reasons. First, cars are very important to the American psyche. Think about James Dean and his motorcycle, “On the Road Again,” and all that. The American psyche has associated freedom with cars, and now it costs a lot more just to use your car and get this feeling of freedom.

Second, bankers have told us for years, “Your house is your most important asset. You should stretch and buy as much house as you can.” Now, it looks like they lied to us in terms of how much we should borrow. And they personally made money in the process!

Third, I think the American people are really losing trust in our institutions. Think about all the meltdowns. First, it was the Internet. Then, Enron. Then, a banking crisis. Then, housing. Now, oil. All of these disasters are coming relatively close to each other. To people, it seems like there’s something incredibly wrong with the way markets and institutions operate. Bankers giving crazy loans to people who can’t pay them back, then they turn around and sell the same mortgages to people who know even less about them. It’s incredible. It’s a new version of the Wild West, and it’s causing incredible distrust in the markets and institutions.

So, is the gloomy outlook justified?

I think the psychology is justified. If you thought you lived in a world where you understood the forces at work, and all of a sudden you didn’t understand what’s going on, your trust in the system all of a sudden becomes pretty low. Bankers can give loans to people who don’t deserve them… It’s not a world we understand or can predict.

To read the rest of the interview, go here.

liz | 10:25 AM | Uncategorized

Mitchell Gobrick Says:

He says the economy isn’t really all that bad, like what planet did he come from?

Jul 29 12:21 PM

McBeth Says:

Hmm. While I don’t disagree with many of Mr. Newman’s points I would like to say a brief thing about that whole housing thing. And that thing is:
Pardon?

We each – I am – we all bear personal responsibility for our thoughts and actions. This doesn’t always mean that we get happy endings results from our having been put in charge of it; there’s no amount of pretending that will make that so. Crappy things regularly happen in the best of circumstances; it cascades downhill with some speed in the worse.

I, the consumer, HAVE to educate myself on the purchases I make. That’s easier and quicker to do with my toaster oven but it is just as true that I must do likewise in boning up on the biggies. Like houses.

Now don’t get me wrong, I’m not a big fan of Big Corporations and Other Generally Capitalized Systems. But blaming “them out there” for some woes we may have been silently complicit in bringing upon ourselves by our own negligence cannot, IMO, be justified.

Are we now learning more about systemic housing and gov’t finance problems that went on for far too long? YES. Does it suck that people are losing their homes? YES.

Did too many people buy way way way too much home for what they actually, honestly, truly afford at the very moment they signed the contract? Did they factor in the contractual fine print figures when they calculated their overly optimistic finances?

It sucks, it really sucks. To me it’s like if two of the three little pigs would have spent a few minutes realistic planning their abodes before they constructed em, they might not have had to run willy-nilly to #3 to save their asses.

Jul 29 2:06 PM

Larry Parker Says: