All candidates for culprits ultimately involve false stories that people—citizens, business people, regulators and politicians alike—told themselves. Exemplars: the American dream of home ownership can be made available to all; housing prices tend inexorably upward; massive current borrowing can be repaid from future assumed prosperity; financial risk can be diversified, hedged, securitized away by carving up underlying financial instruments; regulators can let market participants self-monitor and self-correct; and politicians can safely respond to citizen appetites by sustaining all these false beliefs.
Yet these conscious beliefs unconsciously excluded painful truths—the essence of psychological repression. Not everyone can afford or handle burdens of home ownership; housing prices fluctuate according to supply and demand; excessive borrowing is dangerous; financial risk is real and pervasive and cannot be eliminated; markets, like people, including regulators, are imperfect; and politicians act in their short-term self interest in ways that can hurt constituents, not help them.
Equally repressed—excluded from the conscious mind—were recurring examples of similar asset bubbles that eventually burst, including as recently as early 2000’s tech bubble and dating to famous bubbles across the past five centuries.
Asset bubbles are akin to a massive social party of joyous and giddy dimensions. In those times of collective unconscious exclusion of painful memories and realties, party poopers are scarce. Few want to upset the gaiety of frothy markets that suggest flourishing abundance—for nearly all—and runaway riches for the super elite.
The result of the recent repression was a set of pro-cyclical proclivities. Virtually all systemic forces conspired to sustain and reinforce a multi-year boom in housing and financial prices, above what underlying economic attributes warrant.
Repression in economic matters may not always lead to doom. But the scale of unconscious denial of the past five years amounts to a Great Repression. That is the widespread and sustained, if unconscious, denial of economic reality on a scale sufficient so that eventual reckoning spells equally widespread and sustained financial devastation—of which we should now be collectively acutely conscious.
The bandwagon effect is nothing new, of course, and not limited to economics. Fashion, religion, entertainment and politics are other areas where people have tended to instinctively follow the herd for centuries, often into dangerous territory. What has changed in the last hundred years, however, is the technology, media, and globalization that enables herding on an unprecedented scale. We are living in viral times, and while that is great for YouTube videos, it can be quite a bit more unpleasant when wizards in DC and on Wall Street unleash their viruses.
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