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Will the psychological impact of the recession last? — Pop Economics

Will the psychological impact of the recession last?

by Pop on September 25, 2010

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Somehow, Sept. 15, 2008 seems scarier in retrospect.

I went to the movies to see Wall Street: Money Never Sleeps today. I actually enjoyed it more than the first one. It takes place during the financial crisis of 2008 and includes several goings on that roughly mimic the collapse of Lehman Bros. and subsequent fallout.

It was hard not to think about what I was doing during those several weeks in September and how naive I was at how serious the repercussions of Lehman’s collapse would be. I remember reading the original press release and feeling bad for those investor and media contacts at the top of the page. I wondered if they picked up the phone.

I remember walking by Lehman’s headquarters on 7th Avenue not two weeks later and seeing its name had been stripped from the building’s signage and replaced with Barclays. It was bright blue and hurt my eyes.

I doubt many Americans could even name the date that Lehman or Bear Stearns filed for bankruptcy (I had to look it up), but we sure all remember the consequences. Savings wiped out. Jobs lost. Pensions threatened. Talk of long-term economic consequences for recent graduates.

But even if the recovery happens more rapidly than economists predict, the psychological toll of ten years of no growth—no real growth anyway—could have a long-term impact on how we behave going forward. Anyone have a grandmother who lived through the Great Depression and only invests in Treasury bonds?

You probably lost confidence.

One of the greatest things I lost in the economic collapse was my confidence about what the right ways to think about economics, finance and investments were. I had always approached investing with a bit of skepticism. It seemed that market sentiment/investor behavior had so much control over stocks that research into fundamentals, like the P/E ratio, dividend yields, etc. mattered less and less.

But the Lehman collapse made that confidence even lower. That huge economic force overwhelmed whatever millions of genuinely bright ideas traders had the day before.

The erasure of confidence happened at a less sophisticated level too. Researchers at the University of Arizona, who had fortuitously asked students questions about confidence and finances in 2007, went back to the same group to see how their situations had changed. The results were striking.

They asked the students some finance-related questions in 2007 and in the follow-up. So they knew how adept the kids actually were at finance. After the collapse, the students actually did have a nominally higher understanding of finance. But their confidence in their financial knowledge collapsed.

The students, more than 90% of whom said they were impacted by the recession, also reported pretty bad coping strategies. Budgeting activities were up 3% but actual savings activities dropped 11% (probably due to a lack of resources). Dropping classes was up 169%, leaves of absence were up 106%, and shifting balances between credit cards was up 26%.

Students reported a 5% drop in psychological well-being due to stress. Even relationship satisfaction took a 6% hit.

Some psychologists think the recession’s effects on overconfidence might be fleeting. Apparently, overconfident people have a tendency to bounce back quickly from setbacks, especially when they don’t hold themselves responsible for the setback.

Somehow I feel like for the students, and anyone who happened to be in a formative period, the recession will have a more lasting impact. But hey, I’m no psychologist.

The recession wasn’t so bad if you kept your job.

The National Bureau of Economic Research’s announcement that the recession ended in June 2009 was met with widespread derision, as Weakonomics points out. All the “end” of a recession means is that the economy is growing again. The economy can grow and still suck, just as the Nationals can be a better baseball team this year than last year and still suck.

The thing is, personal economies matter so much more than the economy at large. If you didn’t lose your job, you probably made out all right. Maybe your savings took a huge hit. Used-to-be-soon-to-be retirees might have become frustrated that they had to work a few more years. But the real “losers” in the recession were the ones who stopped getting a paycheck.

On the other side of the coin, those who are looking for a job in 2012 will still not believe the recession is over. Those whose parents are working at age 75 because their savings were wiped out will have their confidence dampened until that situation is corrected.

So this is one case where I’m not so worried about America at-large but about specific Americans who went through particularly traumatic experiences during the downturn. I didn’t lose my job. So I’ll probably work and invest and go on with my life in 2015 the way I always have.

But I bet those kids who had to drop out of school, or those 30-somethings who lost their jobs aren’t going to approach their finances and work the same way ever again.

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{ 5 comments… read them below or add one }

Jacq @ Single Mom Rich Mom September 26, 2010 at 11:35 am

I graduated in 1982 into a major recession that fell on the heels of a major boom – there was a bumper sticker that floated around at the time:
“Please Lord, send another boom. We promise we won’t piss it away next time.”
That recession occurred very quickly and was kind of out of the blue. Just 2 years prior, a bunch of guys I went to high school with had quit school in grade 10 to go work in the oil patch. Most never saved, assuming it would continue forever.
http://www.cdhowe.org/pdf/Robson_GM_Feb27.pdf

Like you, the recent recession hasn’t impacted me personally and hasn’t really affected my geographical area. What does concern me is a couple of friends that have extremely large mortgages for very nice, big homes that are at low interest rates today – but what if the rate doubled? Or tripled? Or one of them lost their jobs and they couldn’t find another? I think there should be enough room on fixed costs or savings so that one can weather a prolonged recession – and possibly benefit from locking some $ away into high interest options. My dad had a friend that sold his farm during that period of time and had T-bills or something locked in earning him 15-18% returns. Cool.

Rob Bennett September 26, 2010 at 1:01 pm

Anyone have a grandmother who lived through the Great Depression and only invests in Treasury bonds?

This comment hits it on the head. I find it maddening when Buy-and-Holders make fun of those who put their money under the mattress, suggesting that they are so much smarter to “know” the right way to invest. We are all influenced by the way people think about investing at the time we are trying to figure out how to invest. People are not smart at some times and then dumb at other times.

The people who put their money under the mattress are just the Buy-and-Holders from an earlier day who got mugged by reality. The common theme is that the person is letting emotion rule his investment choices. Anyone who can come to believe that stocks are always the best choice (regardless of price) can come to believe at another time that stocks are always the worst choice (regardless of price). Emotional investors go to different emotional extremes at different times.

I believe that the psychological impact of this recession (to become a depression in the not-too-distant future?) will last forever. That’s a very good thing. It’s in the time-periods AFTER Buy-and-Hold Eras when stocks deliver their best returns. The longer we keep the lessons we should be learning today in mind, the more decades of economic growth we will see as a result of this painful experience.

Rob

Jan September 26, 2010 at 5:06 pm

Sorry Rob- I cannot follow your train of thought.

I am a buy and hold who got out weeks before the crash. Call it gut. Call it my niece getting a loan on a $200,000 house with nothing down and min wage job. I just knew it wasn’t going to last.

I got back in the market about a year ago. I am still buy and hold- but keeping out a good eye. I have made about 16% in the market in the last year.

The only lesson people learned was the reality of what has been happening in the states for a very long time.
~Many public education settings are more about social commentary (making sure there are no bullies) than actual education (math, reading, writing).
~Health care is out of control. The only people really covered are the old people complaining that the young people shouldn’t have what they already do.
~You cannot pay someone top dollar for putting together a machine with a machine. The steel belt union states no longer make sense and are slowly retooling.
~You cannot sit in a dead town and expect a job to come to you.
~You cannot put money in and just expect it to grow with no overlook.
~If the end of the world really comes- no amount of gold will help you.
~The people make bucks off the internet blog thing have to know it is a bubble as well-.Be ready for a crash. I give it a year.
Media changes, boredom sets in and the populous is off the next thing. Make money while you can- but be looking for the next thing.

Everyone (21-60 yr olds) who really wants a job in my family has found one in the last year- most have switched professions or even moved. The one who returned to school has tons of debt now and is kicking himself. The jobs are there for those who really get out there. I have to admit it was difficult to pry a few of them off of the “I make more unemployed” fence.

I believe this will be a blip in the road for most of us in ten years. My grandson (3 this week) will not hear about this in his classes in sixth grade. Heck- most sixth graders did not even know about the twin towers when I presented this year!

Norman September 27, 2010 at 10:54 am

This recession has been harsher than other recessions but it is really nothing compared to the great depression as far as the magnitude of areas that were affected. But, for the person unemployed, its a depression. I hope what comes out of this is that folks will have a lasting interest in living below their means and not lock themselves into a high living standard that can wipe out their savings and retirement accounts during a period of unemployment. Everyone should consider having 18 months (or more) of living expenses in liquid savings, not just 6 months as some suggest. But, I’ve felt this way for years, not just because of the recession. Maybe its because I grew up hearing about the depression from my father and grandparents.

Ken September 30, 2010 at 4:14 pm

I’m with you the folks who won’t forget it are the ones who lost jobs and significant assets. Strangely enough we built a new home during the recession…that’s something positive we won’t forget….we’ve been lucky to maintian jobs and income.

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