The placebo effect is probably seen more through the idea that we are wealthy on paper when in fact we’re not. The idea that our homes were banks that we could tap into through re-financing, when in fact the value of our homes were based on the market, and when the public woke up and realized what true value was, the paper wealth was eroded and homeowners found themselves underwater on their loans.

We’ve seen the placebo effect–it was done by Alan Greenspan throughout his 18.5 years. When he spoke, the market jumped based on minor inflections in what he said. Now we’ve gotten wise and Ben Bernanke can’t seem to make anyone feel reassured, only more concerned.

But that’s just my own two cents. Still, great article!

The point about governmental policy and placebos is particularly disturbing. My son keeps getting his dander up about how “stupid” some current policies are. I have to keep reminding him that stupid is probably not the right word. If you assume that the STATED goal of a policy (like the bailout or health care reform) is the REAL goal, then yes, they might be stupid. If you assume that the actual goal of the policy makers is something else, then perhaps not.

A do-nothing placebo policy designed to assuage our fear is one thing, but a do-something-else policy with results masked (or created) by the placebo effect and slipped in through the chinks of our national fear is something else entirely.

The old standbys are monetary policy and fiscal policy. But they are losing their effectiveness as placebos because more and more of the public recognize them for what they are – fancy words for fraud and theft.

The challenge is coming up with new ones. The latest?

“Deficits add to…savings.” Warren Mosler, President – Valance Co.

“All we owe China is a bank statement. ” Marshall Auerback, Senior Fellow – Roosevelt Institute and Warren Mosler, President – Valance Co.

“Selling government bonds… is mistakenly called borrowing.” Yeva Nersisyan, Doctoral candidate in economics – University of Missouri

“Banks can lend essentially without limit.” Stephanie Kelton, Associate Professor – University of Missouri

“(G)overnment debt — Treasury securities — are nothing more than savings accounts.” and “Interest on the debt is not … an obstacle to increased federal spending.” Randall Wray, Professor of Economics – University of Missouri

When those who are considered to be economic experts say savings is the same as debt, deficits add to savings, we don’t owe money to China, bonds are not debt instruments, banks can engage in limitless lending, and our government can spend without regard to market rates, it’s time for new experts.

Or better snake oil salesmen.

Rob