Editorial

The mass psychology of financial anxiety

Sunday, February 19, 2012    

Print this page Email A Friend!


Crisis can be precipitated by real or imagined events. This is particularly the case when information is incomplete or incorrect or when everyone does not have the same information.

Information inadequacy together with the well-documented "herd instinct" of people can lead to disaster if it develops into panic. Financial crises are caused by herd instinct born of irrational exuberance or fear and panic. They often occur in sequence with exuberance, passing into complacency and then mutating into panic. This cyclical pattern has persisted throughout history and across countries, both developed and developing.

Panic may be both rational and irrational in origin, but when it is irrational it emanates from a mass psychology of anxiety. We are witnessing this on a worldwide scale where rating agencies have been wrong so many times, as is evident in their not correctly identifying all major recent financial crashes eg Lehman or Ireland. They now have the dubious reputation as early alert systems for financial regulators and investors. This is no surprise since their prognostications have such a large element of hearsay that it is economic alchemy and not economic science.

Because of the prevailing psychology of anxiety, rating agencies and some international financial institutions are now downgrading local financial institutions, banks and countries. Having failed to detect and warn against financial implosion they are downgrading countries that are not in dire economic trouble, the most extreme case being the downgrade of the debt of the United States.

They are now warning against countries like France and banks like Credit Suisse in case something was to go wrong and they were caught napping again.

The grave danger in a world of incomplete information is that their pronouncements are regarded as credible by enough people to make their prophecies self-fulfilling. They create financial crises because they feel safer to predict doom and gloom, because if it happens they are vindicated, and if it does not, they at least were not wrong again. These rating agencies can be cavalier in their predictions because there is no penalty for their irresponsible conduct.

Their predictions are just as harmful as the imprudent financial conduct of financial institutions they downgrade. In our view, they should be regulated by an international body such as the International Monetary Fund (IMF). And institutions and governments that can prove damages should be allowed to sue.

Finance Minister Dr Peter Phillips' recent trip to Washington, DC and New York has forestalled the anxiety among the international financial institutions, banks and rating agencies. He has convinced them that there is no need to panic about Jamaica. The good 'doctor' has bought us some time. He must now ensure that his technical team completes the IMF negotiations as soon as possible.

ADVERTISEMENT

POST A COMMENT

HOUSE RULES

 

1. We welcome reader comments on the top stories of the day. Some comments may be republished on the website or in the newspaper – email addresses will not be published.

2. Please understand that comments are moderated and it is not always possible to publish all that have been submitted. We will, however, try to publish comments that are representative of all received.

3. We ask that comments are civil and free of libellous or hateful material. Also please stick to the topic under discussion.

4. Please do not write in block capitals since this makes your comment hard to read.

5. Please don't use the comments to advertise. However, our advertising department can be more than accommodating if emailed: advertising@jamaicaobserver.com.

6. If readers wish to report offensive comments, suggest a correction or share a story then please email: community@jamaicaobserver.com.

7. Lastly, read our Terms and Conditions and Privacy Policy



comments powered by Disqus
ADVERTISEMENT
ADVERTISEMENT

Poll

Have you seen an improvement in the Government’s handling of the chik-V outbreak?
Yes
No


View Results »


ADVERTISEMENT

Today's Cartoon

Click image to view full size editorial cartoon
ADVERTISEMENT