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Zachary Karabell Headshot

Fear Itself

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As of today, the global financial system is gripped by panic. In the past two weeks since the bankruptcy of Lehman Brothers, the fear and chaos have accelerated dramatically, and the failure of Congress to pass its proposed $700 bailout bill on Monday unleashed a new wave of panic. That is the situation we find ourselves in now, with safe havens almost non-existent save for those betting against the market completely, or who have retreated to cash. Relief rallies notwithstanding, this is a market in the grip of animal spirits, and the stampede is heading for the exits.

But a panic it still is, rather than a real economy meltdown. The gears of the financial system are grinding to a halt, and soon enough, if they don't get moving again, it will spill over and become a real economic meltdown. The fear is that we are on the precipice. It certainly feels close, but this isn't horseshoes, and close is still just that. Until it happens, it hasn't.

Yes, the real world economy of the United States is weak and slowing and has been for some time, and yes, tens of millions of people are locked in a recession of wages and declining spending power that is likely to get worse before it gets better. But the fallout on Main Street is still a far cry from the breakdown of Wall Street. That is why, in part, so many are opposed to the government bailout bill: there still is a feeling that this is the chickens coming home to roost for Wall Street rather than a crisis in the real economy. And while there is a certain bitter justice in hearing the pleas for government rescue coming from a community that has tended to scorn government, the fact remains that whether or not you like the denizens of Wall Street, the financial system is a vital component of a functional society. It can partly implode without bringing down Main Street, but not completely.

The panic is fueled by fear that total implosion is imminent and that Main Street is imperiled. At times of intense fear, it is almost impossible to argue credibly against that. That is what makes these moments precarious, and what Franklin Roosevelt so brilliantly and acutely understood when he said in the midst of the darkest days of the Great Depression, in his inaugural address in 1933, that fear is the real danger. In his exact words: "the only thing we have to fear is fear itself -- nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance."

Fear grips and paralyzes and distorts. It becomes a lens that refracts all data through a sinkhole of despair, and it makes it impossible to attain a rational view of what is happening.

And right now, while banks are teetering, real world demand is at worst softening. Apple, whose stock plunged more than 40% in recent weeks, or Research in Motion, maker of the Blackberry, are seeing somewhat weaker demand, but are still selling billions of dollars of hand-held communications devices. Yet, Research in Motion's stock price lost 35% of its value in less than a week. Amazon.com has been posting record revenue even as its stock price plunges. Iron ore shipments and demand on the ground in China, copper demand in the developing world, construction projects in the Persian Gulf, infrastructure needs for Brazilian energy companies, none that is showing signs of slackening. Yet the equities of companies in those businesses have been sliced in half. Even China's purported pullback owes more to a halt in activity during the August Olympics than to any blowback from weakness in the United States or Europe.

None of that matters in these panics, but panic doesn't make those fundamentals untrue. The evisceration of equities of companies that are seeing substantial growth is an irrational byproduct of a system in disarray, and we need to remind ourselves of that. There are many pundits who have made it their bread and butter to forecast this collapse, and they are not about to present a fair and balanced perspective - and nor are the analysts and investors in the heart of Wall Street who are currently seeing their investments in free fall.

So what to do? Recognize this for what it is and isn't - right now. That doesn't mean fears won't come true, but there are other factors at work that don't fit the narrative of utter collapse and don't accord with the omnipresent mood of impending doom. For every data point tilting toward the apocalypse, there are others moving in another direction. Just today, a Chicago survey of purchasing managers showed surprisingly strong growth. The markets are deteriorating well in excess of the fundamentals; a substantial government intervention has the virtue of stemming the tide, just as Roosevelt's "bank holiday" gave some breathing room. But we all need to take a deep breath and remember that fear itself has a destructive power, and that acting from it - individually but even more, collectively - is a path that leads nowhere.