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Friday, October 10, 2008

Panic is the Incorrect Term

'A panic is a "situation in which people do things that contradict rationality," says Paolo Pasquariello, a professor at the University of Michigan's Ross School of Business.'

I disagree. There is nothing irrational about taking your money out of stocks and financial instruments in general in a situation of intense market uncertainty. The argument that the "real" economy isn't that bad, so why make such rash decisions is ridiculous given the fact that the "real" economy, more and more since the financial credit explosion of the 1970s to today, is the financial sector. IE, the financial sector is inextricably linked to the traditional real economy.

People aren't in a "panic." They are worried. They see rising uncertainty and a financial sector in shambles. Panic implies people making impulsive decisions when things aren't that bad. Economists and pundits should take a lesson from history. The last time we had a major "financially caused" recession was the Great Depression. Most all the recent past recessions have been due to bubbles in physical assets (which is what this started out as but got infinitely worse because of the securitization of those assets - which is a financial problem), shocks to input prices, etc. I don't personally think this will likely be a depression, but this will be one hell of a recession - there's nothing irrational about preparing for it.

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