A delusion of confidence
by David Atkins
Krugman:
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.
The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.
"Investor confidence" and fear of the big bond traders have to be the two most amazing frauds perpetrated on the public in modern history. Neither have a shred of evidence to back them up any more than the notions of heaven and hell do, and yet they've been treated as scientific principles on which entire economies should base their decisions.
Yes, there's some corruption behind the perpetuation of these myths. But not every person in academia, punditry and government all across the industrialized world is taking a payoff. There is such a thing as mass delusion and collective hysteria that cause large numbers of even highly educated people to believe things that just aren't so. I saw this in bewilderment during the middle of the last decade as everyone I knew rushed to buy real estate even though I counseled them all against it. I wondered if I was actually the crazy one. I wasn't, of course. The entire world was crazy, believing in the reality of an illusion, propped up by the head-nodding reinforcement of every other intelligent person anyone seemed to talk to. Paying rent was just throwing away your money when you could get rich for doing nothing, just by buying a condo. Heck, everyone knew that.
We've been living through just such an era in economics, as entire nations pray at the altar of confidence fairies and tremble at the scowlings of insignificant bond traders. It will look amazingly stupid in retrospect. Yet sadly it probably won't be the last time it happens.
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