Reluctance as a Rational Choice During Recessions

This morning’s NY Times piece (02/28/08) about Ben Bernanke, the chairman of the Federal Reserve, says that he believes the economy is slowing down and that people are reluctant to spend, businesses are reluctant to invest, home buyers are reluctant to buy homes, and banks are reluctant to lend.

What underlies this outbreak of reluctance? Fear, fear of loss, fear of negative consequences, and fear of what the future holds. Is this fear rational and reality based or is it a figment of people’s imagination?

Clearly this is a case when reluctance is rationally, objectively based…credit is tight, home prices haven’t finished falling, energy prices are rising meaning less money for discretionary spending. Hence, we would say people are acting rationally even as Bernanke and others are trying to influence objective conditions so as to change perceptions and beliefs so that people will act differently; that is, they will spend and lend and return to healthy commercial interactions which sustain people’s livelihood and the pursuit of profit.

All of this information is second hand. It is what the press is reporting. Bush says we are not entering recession and reminds everyone that a cash bonus is coming in May, a message calculated to get people spending again as at former levels.

Hence the leaders are giving conflicting opinions and information about what is going on. And this in turn creates a climate of uncertainty. And what do people typically do when they are uncertain? They procrastinate, put off, hide out, and make themselves disinclined to act.

The smart money will see opportunities and will invest with hopes of a fancy profit. But most will hunker down and be safe. Only later events will show who benefited in these uncertain times. For now, though, we seem to be entering a time when reluctance to spend and lend is a rational choice which only highlights those times when reluctance is a poor choice driven more by inner compulsions and irrational fears.