Posted 12/18/2008

OBAMA HAS TOO MANY ECONOMISTS
AND NOT ENOUGH PSYCHOLOGISTS

President-Elect Obama has appointed a whole stable of brilliant economists, but he may be missing the boat.

Expertise in economics, statistics, trend analysis and capital flows will not really help our new President understand the current mess – let alone solve it.

The real problem is psychological. Mass psychology, if you will.

You've already seen it with the bankers who took the money, but refused to lend, as they were expected to by Fed Chairman Bernanke and almost all economists. Since the failure of Lehman Brothers, bankers are saving their new funds – too afraid of the risk involved in lending.

Now the same thing is happening with the consumer. The consumer, who in recent decades accounted for 70 percent of the nation's economy, is now too scared to spend a lot. Too little personal income growth and two many job losses have produced a major decline in consumer spending at all income levels – the first time this has happened since the Great Depression.

Horace J. Consumer III has seen his net worth damaged by two equity implosions and the collapse of the housing market. He may be scarred for life when it comes to taking the risk of investing and going into debt. As a matter of record, Horace's debt-to-disposable income ratio has been falling for two straight quarters from a high of 140%. If he is frightened enough, his ratio could easily fall to the 60% to 70% levels of the 1970s.

If that happens, the economy is never going to come back all the way.

In truth, American economic history is simply repeating itself. As is American psychological history.

The original Horace J. Consumer made a lot during the Roaring Twenties, but lost it all in the stock market collapses of 1929-1931. Psychologically abused by the Great Depression, Horace stopped spending and ceased investing even when the economy recovered with World War II. Horace became a professional saver, just like tens of millions others who had gone through the 1930s.

Horace J. Consumer II, born in 1935, grew up without any memory of the Great Depression. Instead, he remembered the wartime economic boom when everybody had a job, and the post-war years when America got rich. His life experiences turned him into a confirmed optimist. One who would invest heavily in the stock market – like tens of millions of his compatriots.

Savings accounts were non-productive and stupid to this more modern Horace. Banks became totally confused about trying to deal with a father who wanted to save and his son who wanted to invest.

Horace J. Consumer III was born in the times of easy credit and extravagant spending. Psychologists and sociologists called it an era of "conspicuous consumption." Horace III believed in the mantra, "If you've got it, flaunt it." He didn't worry about keeping up with the Joneses, he wanted to be the Joneses. With every man, woman, kid and dog receiving credit cards in the mail, money was easy to get. Like tens of millions others, Horace III piled up more debt than he had in his retirement accounts.

But now the myriad economic bubbles are bursting and fear again stalks the land.

Ten year-old Horace Consumer IV is hearing too many frightened conversations at home. He has started wetting the bed since he heard his mother crying over his father being fired. (He thought being fired meant being thrown into a big bonfire.) When little Horace was given his allowance, it was a little short. Even so, he decided to save half of it.

Thus history repeats.

1. Fear turned Horace into a saver.

2. Optimism turned Horace II into an investor.

3. "Irrational exuberance" turned Horace III into a spender (and debtor).

4. Fear is turning Horace IV into a saver, just like great-grandfather.

If fear turns Horace III and his son into savers, the economy will remain sick for a very long time to come.

President Roosevelt said, "The only thing we have to fear is fear itself." But he and his spending programs could not pull America out of its funk. (It took World War II to do that.)

That's why President-Elect Obama needs a lot more psychologists and historians on the payroll – and a lot fewer economists.

He has to learn how to solve the overwhelming fear problem before it turns us all into savers.

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