Fear Factor

The stock market rebound of the past two days has alleviated for the moment some of last week’s fear of a complete economic collapse. While the concerted actions taken by the leaders of the major industrialized countries has momentarily calmed nerves, the public remains justifiably worried about the extent of job losses, the rise in the costs of basics such as food, and declines in the value of their retirement accounts.  Even before this month’s stock market volatility, indicators showed increasing stress levels attributable to the growing economic problems:

Changes in Levels of Stress, April to September 2008

                                    All            Male            Female

Money                    75%-81%        71%-78%        78%-83%

The Economy          66%-80%        61%-75%        71%-84%

Health Problems      59%-57%        55%-63%        64%-70%

Job Stability            48%-56%        45%-55%        50%-57%

Source: American Psychological Association

CNN noted in its examination of this data from the American Psychological Association that “the declining state of the nation’s economy is taking a physical and emotional toll on people nationwide, and it is women who are bearing the brunt of financial stress . . . because they are less economically secure than men.”

The survey also showed that “older Americans also cited money as a source of stress, more so than younger generations. In the survey, 79 percent of the baby boomers and 73 percent of those who are 63 years and older identified money as a source of stress.”

These concerns replaced personal finances, work, and issues related to raising children at the top of list of the causes of stress. Moreover, “60 percent of poll respondents . . . report that they’re feeling angry and irritable, 53 percent reported feeling fatigued and 52 percent said they lie awake at night” as a result of their fears.

These reactions to stress will dampen efforts at recovery:

• When it comes to workers, it affects productivity, for people experiencing these reactions find it difficult to concentrate and work to their best level.

• When it comes to the population in general, it causes a loss of consumer confidence, resulting in less spending by young people who fear ever getting a decent job; somewhat older people who worry about losing the jobs they have; and the elderly who can only watch as their savings bring in less interest and their pensions shrink. A downturn in spending will create additional problems for industries that are already hurting and could go under, such as the automobile industry or retail stores.
• When it comes to investors, these fears are likely to slow their return to the market, according to the New York Times, which reports, “Investors have withdrawn more than $81 billion from stock mutual funds since the beginning of the year, with nearly 40 percent of that coming in the last six weeks.”

Moreover, the media are reporting some additional crises ahead, which, if they have a strong effect on the market, will serve to deepen these concerns. For example, this week’s BusinessWeek reports that the “next horror for beaten-down financial firms is the $950 billion worth of outstanding credit-card debt—much of it toxic.” The article goes on to explain,

That's bad news for players like JPMorgan Chase (JPM) and Bank of America (BAC) that have largely sidestepped—and even benefited from—the mortgage mess but have major credit-card operations. They’re hardly alone. The consumer debt bomb is already beginning to spray shrapnel throughout the financial markets, further weakening the U.S. economy. “The next meltdown will be in credit cards,” says Gregory Larkin, senior analyst at research firm Innovest Strategic Value Advisors. Adds William Black, senior vice-president of Moody’s Investors Service’s structured finance team: “We still haven’t hit the post-recessionary peaks [in credit-card losses], so things will get worse before they get better.” What’s more, the U.S. Treasury Dept.’s $700 billion mortgage bailout won’t be a lifeline for credit-card issuers.

If, as a result of problems with credit cards, more banks experience trouble and teeter on the edge of failure, the fact that deposits are insured by the federal government may not be enough to keep people from withdrawing some of the money they have and putting it into safe deposit boxes, buying gold, or stuffing it under their mattresses, thus tumbling the economy closer to a complete meltdown.

The concerted efforts under way by the G-7 nations, combined with the promises of the International Monetary Fund, need to be clearly explained and carefully promoted to the public, with honest details provided about how long a recovery may take. Keeping the public calm by acting in ways that restore confidence in its own right is essential to creating an environment that will enable the economy to recover sooner rather than later.