Discipline or Bust

Does the aggregate level of self discipline within an economy play a role in our economic stability, or more specifically—does it determine the extent to which our economy will be able to recover from a crash? Some leading economists seem to think so—I agree. Dr. Brian Knutson a Stanford Psychologist has published a number of articles that have linked the idea of us receiving a large sum of money, to stimulating the same emotional sensors of the brain that sex and drugs activate. In other words—money and the idea of consumption is a very powerful stimulus. His work is helping financial planners better understand how to consult their clients; how casinos can take advantage of individual’s emotions to increase profit and the like. The idea that emotion affects our financial decisions is nothing new and seems almost common sense, but what if those at the lower income brackets all overspend and refuse to live within their means? Dr. Steven Gjerstand’s (a Nobel Peace Prize recipient) article hypothesizes that excessive consumer debt is the differentiating factor present when our financial markets crash and have a difficult time rebounding. If his hypothesis is correct, we may be in a world of hurt. Remember, Dr. Knutson has linked our response to money as being on the same level as some incredibly powerful stimuli (drugs and sex)—as long as liquidity is available to the undisciplined, consumer debt will continue to grow and increasingly violent market corrections will, hopefully sooner than later, beat us and our government into living within our means. In the mean time, small businesses lack liquidity and in most cases need credit to achieve a scalable system. Only time will tell how markets and regulators will respond, but make no mistake—self discipline is a variable we must reconcile with.

Bankruptcy Reform Bites Back

In this article here, a tougher bankruptcy law pressures Americans to pay toward consumer debt (like credit cards) than to other debts instead of witting them off. Homeowners are now less able to meet mortgage obligations which increases the likelihood of foreclosures.

The entire credit crunch problem that we are facing is a dirty and ugly situation without a clean and clear resolution. The justice side of me wants to make all consumers suffer and pay for all the debt that they accrued, as well as get after the credit institutions that created and promoted the environment that got us here. But nobody likes to kick families out in the cold dark street, it just seems so inhumane. So what is to be done?

I am a strong believer in the free market and the invisible hand. I think there will be many short-term and some long-term losses, but overall the market and consumers will adapt, and there won't be throngs of homeless scouring the streets of homes they once occupied. Hopefully this is a lesson learned for consumers to not live on the edge of their financial limitations, as well as a lesson to lending institutions to be more selective when handing out money. The truth of the matter is, there is no winner in this type of situation, and we will all suffer or feel the pinch in one way or another.