Investing Curiouscatblog

Tag: psychology

  • The USA Economy Needs to Reduce Personal and Government Debt

    The economy has structural problems. The solution at this time is not to convince people that everything is fine and just go spend money you don’t have. Personal debt is much to high. The practices that allowed huge anti-competitive and economy endangering institutions to threaten the economy have not been addressed. Hundreds of billions of dollars have been given to those who caused the credit crisis. Making the federal debt problem even worse.

    Some suggest we need to regain consumer confidence. Unfortunately that fixes nothing. That “strategy” is just to convince people problems don’t exist and buying what you can’t afford is fine. Just convince people to go spend more money, run up their credit card debt, borrow against their house, as long as everyone believes it can continue. That can work for awhile but it then fails due to structural issues. And the solution becomes more and more difficult the longer such a strategy is used. The same way a ponzi scheme eventually implodes.

    If you could convince those in a ponzi scheme (and new investors) that they should just be optimistic it can continue. But eventually people ask for their money to buy something and none exists and the scheme fails.

    With an economy, after structural problems are addressed then you need to convince people to be less fearful and to be more optimistic. Because often by that time people have become so fearful that they are not taking even reasonable steps. They don’t buy even though they have the money in the bank and have a real need for the purchase. When this happens, convincing people that the economy is stable is important. However, cheerleading and convincing people to just continue to run up their debts to spend more is not wise when the economy is already far to in debt is not wise (though it is politically expedient).

    The USA needs to stop living beyond its means. That is the most important factor to long term economic strength. But the focus doesn’t seem to be on doing this, instead it seems to be on printing money to paper over the problems. There are many great strengths of the economy and those have allowed huge federal deficits, huge personal debt, monopolistic practices, destabilizing financial risks taking… Even with that things have been quite good. But those areas need to be addressed over the long term.

    Related: Let the Good Times Roll (using Credit) – Families Shouldn’t Finance Everyday Purchases on Credit – Living on Less

  • Leverage, Complex Deals and Mania

    Anyone involved in finance should understand mania in the markets. It is not a shock that financial markets do irrational things. They do so very frequently. Anyone who has not read, Manias, Panics, and Crashes: A History of Financial Crises, should do so. Leverage often is a catalyst that turns bad investments into panics that damage the economy. A previous post on this topic: Misuse of Statistics – Mania in Financial Markets.

    Enron was the pit canary, but its death went unheeded

    Just as Enron packaged bad investments into a private equity fund run by its chief financial officer, Wall Street packaged mortgages given to people who couldn’t afford the payments into sleek new instruments called RMBS and CDOs. But Enron’s machinations couldn’t make the losses go away, and Wall Street’s shiny acronyms can’t turn a defaulted mortgage into good money.

    As for the lessons we’ve forgotten, how about this one: financial statements aren’t supposed to be fairytales.
    …
    when all was booming, Wall Streeters said they deserved their pay because the market said they were worth it. But now things are falling apart, they say the market doesn’t work, and we need to stop short-selling, and taxpayers need to pony up. If there is a tiny bit of good in all this, it’s that Wall Street, although it was complicit in the Enron mess, managed to walk away relatively unscathed. This time, Wall Street has brought itself down.

    I think the odds that Wall Street has brought itself down is very low. Even that the ludicrous excesses of Wall Street are at risk is very unlikely. Perhaps for a few years their might be some restraints put on excesses. But most likely politicians will respond to huge payments by arranging favors for those that want to bring excesses back. If this can be prevented that would be great, but I doubt it will.

    Related: Investing books – Tilting at Ludicrous CEO Pay – Losses Covered Up to Protect Bonuses

  • Buying Stuff to Feel Powerful

    New research confirms feeling powerless leads to expensive purchases. So in addition to learning about personal finance logically it can be important to build your self esteem in order to improve your financial position. For many people understanding human psychology helps them take more control of their own life. And can help when helping others.

    Feeling powerless can trigger strong desires to purchase products that convey high status, according to new research in the Journal of Consumer Research.

    In a study that may explain why so many Americans who are deeply in debt still spend beyond their means, authors Derek D. Rucker and Adam D. Galinsky (both Kellogg School of Management at Northwestern University) found that research subjects who were asked to recall times when someone else had power over them were willing to pay higher prices for status-symbol items.

    “This increased willingness to pay for status-related objects stems from the belief that obtaining such objects will indeed restore a lost sense of power,” write the authors.

    Instead of allowing yourself to submit to this impulse you will put yourself in a better position if you refrain from trying to buy a sense of power. Take a real look at your position and make changes that move your personal finances in the right direction.

    Related: Buy Less Stuff – Too Much Personal Debt – Financial Illiteracy Credit Trap – Curious Cat Investing Library: Personal Loans