We are hearing a great deal about the credit crunch, recession and the perils of organisations in the Financial Services Sector this week, but the thing that seems to create the most concern in people’s mind is the lack of control they have over these volatile events. The seismic movements, both up and down, in the stock market feel to most of us like the result of some abstract, theoretical game that other, loftier beings are playing in a far-off land. The fact is that, for the most part, we just have to accept the consequences of other people’s decisions and that makes us feel uncomfortable. You could say the same about government decisions to which we are all subject – but, whether we like the consequences or not, we did at least elect those making the decisions.
With the current financial crisis we hear about one disaster after another on a daily basis, without ostensibly seeing anybody in government (our representatives) or from the Regulators doing anything about it – except to remind us that it is a global crisis! In the last few days, the authorities in the US have taken fairly dramatic steps to take control of what seemed to be a system in free fall, and that has, at least temporarily, steadied the markets.
In the UK, there has been less dramatic action with the partial ban on ‘selling short’ – the practice accused of causing many of the problems of the last few weeks. This is in direct contrast with the US, where even at the earliest stages of the crisis they significantly reduced interest rates. That wasn’t enough at the time, but with the recent infusion of capital into the markets, the decision to send out a tough message to the market by refusing to bail out Lehman Brothers and the decision to harness the bad housing debt under US government stewardship, the markets are now much more likely to stabilise.
But why haven’t we in the UK acted more quickly? Why didn’t the regulators, the Bank of England, and the Chancellor take some action to help make people feel better ‘psychologically’ – like something was actually being done. And that is the issue here – the lack of confidence that is now affecting the world of business has some of its roots in this failure to act decisively.
When individuals are in personal difficulties, we psychologists tell them to take control – think of the options to deal with your problems and then take action. It is a shame that governments don’t think about the psychology of their actions or non-actions, relying too much on economists who are more interested in fiscal / monetary policy and related interventions than the real consequences for UK and world citizens. Governments, like individuals, need to consider the psychology of critical events. We need not just a Monetary Policy Committee, but also a ‘Psychology Policy Committee’ or ‘Economics Psychology Group’ to help think through the likely impact of economic interventions.
