Inspiring Confidence Bait and Switch, Ponzi Schemes and other Popular Social Constructs

01/20/2017 12:49 pm ET Updated Jan 21, 2018

Robert Shiller, the Yale investor extraordinaire writes "In my 2009 book with George Akerlof, Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism, we argued that business fluctuations are substantially driven by fluctuations in confidence, in trust, in narratives. Still, I now feel skeptical that Trump can keep anything like his growth promise." https://yalealumnimagazine.com/articles/4425-the-next-four-years

In that short summary Shiller gives hope that Trump may indeed grow the economy by inspiring confidence, and then dashes that confidence with his Ivy League skepticism! Confidence can be inspired by bravado, machismo,charisma; and because of this we can be susceptible to the selling formula summarized as "Bait and Switch." This unscrupulous but common practice in today's world ropes in confidence by advertising a fantastic price/rate or term of agreement (the "bait"), and then, once we are in, attempts to sell us a more expensive, unsafe, badly made or even dangerous product/service (the "switch"). We like to go for things we believe in, over and over again, until we don't. Then we massively lose confidence causing a "run on the bank": everyone wants out at the same time, sometimes causing chaos and the demise of social constructs that might have been running along quite smoothly despite terrible flaws.

One form of "bait and switch" is named after Carlo Ponzi, the charismatic immigrant from Italy, who arrived, like so many hopefuls, with nothing in his pocket but a dream to make millions. His bait was to offer a guaranteed investment in stamps (that were never acquired), and for a time his happy customers got double their money back within months, all paid from new investors. By the time confidence in his scheme was destroyed by a newspaper inquiry he was making $250k per day with plenty of mindless customers. When the game was up, new customers lost their shirts since there was no new money coming in with which to pay them.

This country's debt is in a similar precarious position, because if our debt is called and new treasuries aren't selling, there would be no new money to pay interest on the old. Nevertheless, as David Leonhardt in NYTimes Direct today writes: "Few, if any, current Republican leaders care deeply about the deficit. .... As Dick Cheney said, 'Reagan proved deficits don't matter.' ... Paul Krugman's column today notes that the new Republican budget resolution would add $9 trillion in debt over the next decade." http://www.nytimes.com/2017/01/09/opinion/deficits-matter-again.html?_r=0

Deficits matter if there is a "run on the bank." To keep that from happening, confidence in our country is as essential as paying down our debt. The question of the day is this: will Trump inspire confidence or violence?

Unfortunately, as an "overrated actress" warned last night http://www.bbc.com/news/entertainment-arts-38556030 : machismo can inspire violence, and in a virtual reality world where so many spend hours a day watching violence, we can be concerned that sociopaths may be emboldened on both sides of a populist world. Terrorism has many faces: Have we forgotten Timothy McVeigh?

What can we do to feel safe and confident? Build neighborhoods, invest locally, grow your own. Work with, buy from and invest in trustworthy organizations! Trust Across America has shown in multiple studies that "long-term success is built by embracing trust as both a business "imperative" and long-term strategy." In their study of public companies the outperformance of trusted companies is palpable. http://www.trustacrossamerica.com/documents/index/Return-Methodology.pdf

Social constructs, good or bad, only work if there is ongoing confidence in the responsible party. Whether it's a fraud or a legitimate investment, a "run on the bank" can undermine it. This is all the more true when the money invested is borrowed money, and even more when the lender is lending out money they actually don't have.

In 1929, the stock market crash was a crash of confidence. Investors in the 20's had gotten used to borrowing from banks to buy shares in companies that were increasingly overvalued, driven by overconfidence! When stock prices fell, neither the investors nor the banks could pay back loans and almost 2000 banks were shuttered.

Upon inauguration in 1933 FDR focused on building confidence. He immediately declared "Bank Holidays" and closed all the banks until they were found to be sound enough. Soon Roosevelt began his "fireside chats" on the radio: "I can assure you, my friends," Roosevelt intoned, "that it is safer to keep your money in a reopened bank than it is to keep it under the mattress." http://www.history.com/topics/bank-run Confidence returned en masse, whether justified or not, and the recovery began, fueled by massive government spending in public works.

Managing confidence is possibly the most important job of any leader or group of leaders. The Bait and Switch technique only works in the short run. It gets people elected and customers into stores. But if there is no "there" there, confidence can erode quickly. The confident circulation of money is essential to all economies and to the world economy as a whole. Let us circulate it where it is needed with positive impact in mind!