Fear-Based Economics

Imagine this: In some areas of the country, five short years after the catastrophic bursting of the housing bubble, the only way to be a successful bidder on a house is to come up with cash within a few hours after a house is offered for sale. The New York Times quotes Kameron Eliassian, a Los Angeles real estate agent: “It’s everyone from a kid out of law school to an investor from China, walking around with thousands to spend. I don’t know where it’s coming from, and I don’t care. Just show me proof that it’s there, and we’re good.”

Kameron may not know where the money is coming from, and he may not care; but we know where the money is coming from, and we should care. When the Fed injects new money into the system it is not spread equally among the population. New money first ends up in the hands of those who work in the financial sector. New money ends up in the hands of those who work for defense contractors and other areas where government spends freely.

We should care because this new housing bubble will end badly—again. Clearly the echo boom in California is not sustainable. Yet, “Don Faught, a manager with Alain Pinel Realtors near San Francisco, said the current market is turning buyers to desperation, particularly because the turnaround has come so quickly.” Desperation, born of fear, is not a good basis for make financial decisions.

Why so much fear? Do buyers really believe again that housing prices are to go up so rapidly that they will be permanently shut out of the housing market? Are they frightened that they are missing out on their ticket to a big windfall in future housing gains?

And what about the Fed? We are told that the Fed has no choice but to have an unprecedented aggressive monetary policy in order to help the economy grow. For a moment, let’s grant Ben Bernanke the best of intentions.  Is he really frightened that without printing more money the economy would collapse? Niall Ferguson, writing in the Wall Street Journal, asks an important question : “We are assured by vociferous economists that economic growth would be higher in the U.S. and unemployment lower if only the government would run even bigger deficits and/or the Fed would print even more money. But what if the difficulty lies elsewhere, in problems that no amount of fiscal or monetary stimulus can overcome?”

If we look at the behavior of Ben Bernanke as well as the behavior of California homebuyers, fear is a common denominator. Listening to the voice of fear we always hear that we need something outside of us for our life, or for the economy, to work well.  A new housing boom fueled by more paper money is seen as just the ticket in a fear-based world.

But what is going on inside us?  What beliefs need to be questioned? Why doesn’t Bernanke believe in the infinite power of a free people to creatively innovate and create new entrepreneurial opportunities to grow the economy?  Does he really believe that people will sit back and do nothing if they are not being “stimulated” like rats in a cage?

The fears of homebuyers are fueled by the belief that they will be missing out on something important for their future. Can it really be that getting caught up in the herd and overpaying for a house is a key to happiness and financial well-being?

Think back to those moments when you made fear-based decisions. How many of those worked out for you?  Why do we think this time it will be different?

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