Wall Street: the apotheosis of the mob

About a week ago, an economist appeared on NPR and said no economic stimulus would halt the U.S. economic downturn because no stimulus is big enough to move a $12 trillion economy one way or another. He was persuasive, and I bought it, initially. So, apparently, did President Bush, who soon after proposed massive stimulus and specified that it needed to be massive or it wasn't worth doing. But every time I think I understand something, I learn something new that shows it to be more complicated, and sometimes utterly different, from what I initially thought. So I'm always thinking, could this be wrong? Thursday morning I figured out how the economist in this instance was wrong. He was thinking of the arithmetic. He should have been thinking of the psychology. Our economy is the world's largest mood ring. Two of the most important drivers of our economy depend heavily on subjective considerations: consumer spending, which accounts for 70% of all U.S. economic activity, and the stock market, where most of what happens is the direct result of guesswork about what other people are feeling. The Federal Reserve Bank of San Francisco, whose jurisdiction includes Hawaii, issued a report last year on research that found that economic downturns "behave" differently and can last longer when there is a lot of general press coverage of it. After years of prosperity, most of us have a lot of books, DVDs, music, games and other amusements. If we "feel" less affluent or more inclined to be frugal, we can easily dispense with a lot of entertainment spending for awhile. We can spend less on vacations -- very few people ever choose to skip a vacation altogether, but passing up Italy for Vegas is quite common in perceived lean times. We may go ahead with plans for a new car, but buy a cheaper vehicle than the one we originally planned on. We can cancel plans to trade up to a bigger house and stay where we are. This is key: We may do these things, not because our income is down, but because we have heard a lot of press reports of a slowing economy and we have general worries about the future, none of which are yet reflected in our own finances. Our own job -- O.K., it's Hawaii: jobs -- may be secure, but we've seen New York economists on television saying that Fed head Ben Bernanke has acted too slowly. With such a dunderhead running the economy, we think, maybe we'd better put off that cruise. Psychology plays an even greater role in the stock market, where traders are forced to consider, reconsider and again reconsider, not how they feel about things, but how they feel most others will feel. If you're buying stocks for yourself, and for the longer term, and you disagree with the general assessment that a certain company is tanking, a plunge in its stock should not scare you: you can snap up shares at a bargain rate. But what drives the markets isn't buyers acting sensibly on their own behalf. They are driven by traders who have programmed themselves (and their computers) to sell that stock when the price reaches a certain range. Their objective is not to execute trades based on their own best judgment but on their assessment of what the mob is thinking, the better to avoid getting "behind the curve." On Monday and Tuesday, Asia stock markets jumped out the window over bad economic news from the United States, impelling the Fed governors to vote for an emergency cut in interest rates. But there wasn't any important new economic news Monday and Tuesday. They were reacting to developments that U.S. traders had already digested on Friday. Those developments, which did not greatly add to our knowledge of the cooling economy, did not bother U.S. markets as much as they bothered Asia markets three days later. It was as if the story had become exaggerated in the retelling. It is unnerving to realize how little markets and the economy have to do with mathematics. But precisely for that reason, economic stimulus that should be too small to move the economy may be plenty big enough. It doesn't have to move the economy directly. It only has to move consumers to resume their normal spending patterns and they will move it. A vague announcement of a tentative stimulus agreement Wednesday night between Congressional leaders and the White House was enough to halt the Dow's dive, even though it's nowhere close to being passed and will almost certainly be in somewhat different form when it does. Traders think, or they think other traders will think, that this means those people in Washington, D.C., aren't dunderheads after all. What are cruises going for these days, anyway?

Comments

[Laurie Ann]

What a day and night event here.. I just finished reading Lee Cataluna's article on the Gov.'s jaw dropping remark to buy Turtle Bay.. so I began hunting and hunting for your web site.. and wow, what a difference the effort took because I actually never ever thought of her plan from your perspective... and yes, I like it.. I really like it and have read it to a few other family members since. Great job Howard! Well actually.... "Great Job Gov Linda!"