Thought of the Day

Sydney M. Williams


                                                                                         Thought of the Day
February 1, 2010

Writing of the mood in the post-credit-collapse environment, Robert Shiller, in Sunday’s New York Times, states: “The fears themselves are an integral part of the problem. Economists have a tendency to assume that everyone’s behavior is rational. But post-boom pessimism is a factor driving the economy and it is likely to associate with attitudes that may be enduring.”

While I am not an economist, I find Professor Shiller’s comments a little too glib and seem designed to fit snugly within his role of a behavioral economist. Common sense and a reading of history suggest there are times when people act rationally and times when they do not.

In 1933, in his inaugural address, Franklin Roosevelt spoke his famous words about fear: “So, first let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. While the statement provided the memorable phrase, what largely prolonged the Great Depression was not so much fear as it was the tight monetary policies, increased taxes and the passage of the Smoot-Hawley Tariff Act by the Hoover Administration and the continued tight money, trade restrictions and even higher taxes of the Roosevelt Administration. Those policies, along with the attempt by the government to insert itself into the economy, are what prolonged the Depression. A good example of government intrusion into the private sector was the passage of the National (Industrial) Recovery Act – one of sixteen pieces of legislation passed by Congress during Roosevelt’s first 99 days in office, a Bill which encouraged collective bargaining and which fixed work hours and implemented wages and price controls. Such acts did more to extend the Depression than end it. Essentially, it was the advent of World War II that ended the Depression. (The NRA was, fortuitously, overturned by the Supreme Court in 1935, in the case Schechter Poultry Corporation versus the United States.)

A significant reason for the growth our Nation experienced in the last decade or so can be directly attributed to the increase in leverage, particularly for assets and especially for homes. Alan Greenspan famously referred to the “irrational exuberance” as it pertained to stocks in late 1996. That same irrational exuberance caused consumers to bid up the prices for housing, in many cases to levels above their offering prices. That period was a manifestation of people acting irrationally.

De-leveraging during this post-boom period, definitionally, will slow economic growth, particularly at the consumer level. But de-leveraging is rational behavior, driven more by common sense than fear.