As one who considers our “economic crisis” largely psychological, I love this quote from Lawrence H. Summers, director of the National Economic Council:
“An abundance of greed and an absence of fear led some to make investments not based on the real value of assets but on the faith that there would be another who would pay more for those assets,” he said. “Bubbles were born. And in these moments, greed begets greed, and the bubble grows.” After the process eventually stops and reverses, however, “greed gives way to fear, and this fear begets fear,” he added.
“This is the paradox at the heart of financial crisis,” he said. “If, in the last few years, we’ve seen too much greed and too little fear, too much spending and not enough saving, too much borrowing and not enough worrying, today our problem is very different. It is this transition from an excess of greed to an excess of fear that President Roosevelt had in mind. . . . It is this transition that has happened in the United States today.” Read the article.
I’m no economist, but it’s easy to see how a society of people intent on finding new ways to save money will struggle in an economy who’s “health” is directly proportional to money spent.
Here’s how I see it:
- We try to save money.
- Saving money hurts businesses financially.
- We start to get afraid about our jobs because our businesses are hurt financially, so we try to save more money.
- Some of us lose our jobs, but most of us are fine, and we’ve saved a lot of extra money.
- People start spending their “extra” money.
- Businesses start making more money, creating more jobs and paying higher salaries.
- We start buying things on credit we can’t afford because we’re making more money.
- We realize we bought things on credit we can’t afford.
- We try to save money.
But what do I know? I don’t make very much money.
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