Irrational Exuberance & The Roots of Our Economic Problems

by Todd Smith on February 22, 2010

Have you received a bonus this year? Or, are you one of the millions who are unemployed at this time? There has been so much hype about company bonuses in the last year that this country seems to have become an anti-bonus citizenry. Sure, I agree that companies being subsidized by the government to avoid bankruptcy (and an even greater economic fallout) should not be paying exorbitant bonuses. But really, is anyone else sick of hearing about how bad the economy is, and what is or isn’t fair?

irrational exuberance, economic problems

Let’s face it; this country was built, among other things, on the premise of free ideas, enterprise, and capitalism. Anyone who disagrees with that should re-evaluate their definition of the “American dream” and what the modern market economy means. It seems that a lot of what we enjoy today, we owe to one of the strongest economies in the world, which is consequently built upon our ability to work hard, to allow free market capitalism to do its thing, and to innovate. When did we come to be a country of whiners looking for the next scapegoat on whom to blame our financial woes? Companies and employees of companies go to work to make a profit (don’t you?). That’s what keeps the economy going. And, like it or not, bonuses are part of that process.

Don’t get me wrong, there were certainly some unscrupulous (to put it mildly) business activities that directly led to an economic meltdown of historic proportions. And those people involved should be held accountable. But it’s happened, and hopefully we — as a country and as an economy — have learned some valuable lessons.

However, when we blame “crooked CEOs” or the “big Corporations”, are we not missing a valuable lesson too? WE are the ones responsible for our futures and our financial well being –- not other people. Playing the blame game never has helped us and never will. Where is the American spirit to persevere, adapt, and innovate that has helped us come so far? Looking at various websites and hundreds of user comments, I see that these things seem to be missing.

Think about it. One of the contributing factors that led to the economic crisis was us, the consumers. Sure, there were plenty of bad loans being offered, but no one forced millions of financially illiterate people to sign up for mortgages that they had no business applying for. Where’s the financial responsibility there?

Irrational Exuberance & The Roots of Our Economic Problems

Prior to the recession, we were experiencing abnormal economic growth in real estate markets. And, it was simply a matter of time for it to correct itself and bring it back to more normal, sustainable values and growth rates. Who caused this? Did WE? Remember how many people jumped on the real estate bandwagon? Everyone was a realtor, mortgage professional, real estate investor at the time. And, what happened? Real estate values were artificially inflated causing more people to want “a piece of the action”.

As Yogi Bera said “it’s deja vu all over again.” Remember the stock bubble of the late 90’s ? This was the exact same thing. Many believed that it was easy to make money investing in the stock market. Shoot, lots of people were enjoying 20 and 30 percent returns by doing nothing. What did this lead to? This resulted in many people looking for the next dot com, paying over a $100/share for companies that had no sales, inflating values of stock prices; this eventually led to an inevitable stock market correction. Sound familiar? There were, of course, bad companies back then too. Remember Enron and MCI? Like today, they were a part of the problem, but they were not entirely at fault. Because WE are partially to blame.

Markets tend to have a natural equilibrium. When they are low or undervalued, they naturally want to expand. When they are high and overvalued, they eventually contract or correct. A simple analogy is a forest. When the forest is cleared of debris and overgrowth, sunlight and moisture are allowed in for new growth (economic expansion); when there’s overgrowth along with excessive brush and debris, things die (economic contraction) and nature creates fires which clear the forest and restart the cycle. Financial and real estate markets are no different. Prior to the recession, we were experiencing abnormal economic growth in real estate markets. And, it was simply a matter of time for our economy (like the forest and the stock market bubbles) to correct itself and to bring itself back to more normal, sustainable values and growth rates. Who helped caused this? WE did.

The problems were already there and were inherently caused by us consumers. Our common human nature of irrational exuberance, chasing deals and the next money maker, and inability to make independent, rational, and unemotional financial decisions ultimately led us to our own financial demise. Believe me, I feel for those who have been irrevocably damaged by the economy, by unethical business practices, and by greedy corporations. But, please stop blaming everyone else for something you and I helped create. The forest will reestablish itself after this fire. Just be poised to avoid it next time. Become an educated consumer, and adapt to things as they come. Look at things differently. For instance, bonuses CAN be a good thing. Why? Because companies are again becoming profitable. Profitable and healthy companies do not lay off workers — they hire. While I do not see bonuses as a direct link to an improved economy, lower unemployment rates and more hiring is.

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{ 1 comment… read it below or add one }

1 karen February 23, 2010 at 1:45 pm

Excellent post! I keep wondering were all of the personal responsibility went in our country. It can’t always be “not my fault” that we – don’t have a job/can’t read a contract/got too fat! We ALL need to remember how to stand on our own two feet.

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