February 6th, 2009
A few months ago I was reading an article in the The Atlantic titled, Infectious Exuberance. The article is about the factors that led to the meltdown in the housing market. What caught my attention was the way the author spoke about mood. As a student of cultures, I see the strong dynamic that mood plays for whatever culture I may be a member of. It could be the community where I live, the church I attend or the company where I work.
Robert Shiller, pointed out that the underlying factor that is always present in similar situations of a boom is contagious optimism. When we had the Internet bubble bust in 2001, we could track the contagious optimism that guided the decisions of investors who felt that the market was going to continue to rise indefinitely. This same enthusiasm was at play when we felt that housing prices that had been rising rapidly in many areas would continue to do so.
When history is considered, it would show us that in a world of capitalism there has always been rise and fall. This rise and fall is predictable and absolute. So what is it that keeps us from seeing the inevitable when we are in what Shiller calls a bubble? He points out that these bubble are social phenomena. Going further, I feel they are a collective mindset that has a simple story attached to it, “you can get rich without creating anything of value yourself.”
This mindset is so intoxicating that you can only see a reality that supports the mindset. Those that are not infected by the mindset see the world much differently. The know about expansion and contraction and watch diligently for the inevitable change. I mention this to you because this same phenomena of bubbles can be at play in every aspect of our lives.
Now we are on the other side of the economic bubble, the bust part. It isn’t really much different than the boom. In the bust phase, we believe things will continue to get worse. This pessimism continues and, just like the boom phase, it’s a self fulfilling prophecy until it runs out of steam. Then the next boom cycle will begin.
There are some who say we are in such a down swing that the next up cycle won’t happen for six or seven years. I don’t know. What I do know is that we are in a time of adjustment. This boom thinking has run its course. This time around there are different characteristics than in previous busts. For example, for the most part everyone is affected no matter where they live. We have build a very interdependent social and economic system. In past bust cycles, the impact was felt in multiple places, but not everywhere. This is why it is difficult to predict when something will change to move out of the bust cycle and what the change will look like.
I am very curious to watch this cycle to see where it leads. What about you?
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