Fear Itself

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.

Comments

[PumaAnn]

No, it's real. LOL*

What's interesting is that there is no panic.

But no, it's quite real.

[drkazmd65]

Fine - I agree that a total meltdown of the Financial Markets would have very,.. very,.. very,.. very,.. very,.. very,.. very,.. BAD effects on Main Street. But it would have even worse effects on Wall Street.

IF the idiots that led us into this financial mess want US peons to help them out of this mess - THEN we are in the driver's seat. THEY don't get to dictate terms of the bailout. WE get to do it.

Otherwise - I'll be just as happy to pass them a bowl in the soupline as I do any other human being.

[KillTheMessenger]

"But the fallout on Main Street is still a far cry from the breakdown of Wall Street."

I would beg to differ. Main Street has no mechanisms to shield itself from an economic slowdown. It is an immediate and unmitigated threat. In comparison Wall Street bankers with some success in their careers have plenty of financial buffers and effective ways to keep their past earnings safe. Maybe Main Street is not panicking, but then neither is Wall Street. They are just playing street theater. One by one they are doing just fine.

A 40 percent downturn on Wall Street is nothing but a glitch. A 10 percent increase in unemployment will mean tens of millions of lives at stake.

The people who are the most adamant against a bailout will feel the consequences of failure the most. Having said that, I am against a bailout, too. But then, I can afford the consequences and like to watch things go to hell in a hand basket. Some part of this is just entertainment to me. If I was actually part of the people who will be thrown under the bus by an increase in the unemployment rate, I would be begging the government to keep Wall Street happy. Why? My, they are the ones who will do the throwing to increase shareholder value. That's why.

[demfriend]

Odd thing is that when we need someone yelling at the top of their lungs "The only thing to fear is fear itself!" Anyone remeber those words? We have a playbook written when the last depression which people call "great" for unknown reasons. The banks/lenders/housing market all worked together with the government and the people being foreclosed upon and out of house. The houses were way over valued and when the amounts owed were slashed to the reasonable amount they should have been and the taxes also reduced then those who could afford the houses could keep them. Stop all foreclosures and work with those who have jobs still to keep the economy growing instead of the spiral into the crapper. Use some of the "bail out" to make new jobs in energy and community projects. Stop dead all bonus for companies and corporations not making their business work with no pay for failures. Set up re training for many as we do have "technical/trade schools" that can accomodate the people who need it. By putting the people back to work and in their houses the money can go a lot further than just throwing it out a window and hoping someone below can use it wisely. We have the people who know how to make this happen.

[larry278]

FDR said that, "We only have to fear is fear itself." after he threw his hat in the ring. Check out how he ran the state of NY after 1929. We have a depression, not just a melt down. Take off the rose colored glasses & lay off the rose'. See you at the soup kitchen.