Parsing Financial Crisis to Avoid Panic

January 8, 2009

By Chidem Kurdas

 

People are using the “crisis” word to conflate different levels of trouble. In an attempt  to clarify, I thought of a medical analogy. Consider the following situations:

 

1. A man is prone to catching the flu

2. He has a bad flu that may lead to pneumonia

3. He has pneumonia

4. He can’t breathe and is in imminent danger.

 

Case 4 is an emergency that could require life support, cases 3 and 2 indicate a need to contact a doctor but not necessarily to call an ambulance, whereas case 1 says he should get the flu shot.  

 

After Lehman Brothers went bankrupt in September, there were days that the financial system appeared to be in an emergency. That’s not the case now. When people say the crisis is still with us, they mean there’s an economic recession that may become a depression, as in case 2, or perhaps has already done so, as in case 3.

 

All the talk about instituting a new regime of financial regulation actually pertains to case 1. The question in that case is whether there is a way to prevent future problems without causing other damage. While a more-or-less effective flu shot that does not cause brain damage exists, it is questionable whether there is a similar preventive for financial crises.

 

In any event, distinguishing the levels of financial-economic distress is not a semantic exercise; claims of continuing crisis encourage panic and calls for extreme government action. Vaclav Klaus, president of the Czech Republic, makes the point in a bravely contrarian op-ed piece in the Financial Times. “We should not panic and must say No to people who – by describing the current moment as the historically unique one – want only to manipulate us,” he writes. Click for Klaus’ “Do Not Tie Markets – Free Them.”

  

The Czech Republic has just taken over the EU presidency. The cool headedness Mr. Klaus displays is reassuring.

2 Responses to “Parsing Financial Crisis to Avoid Panic”

  1. Mario Rizzo Says:

    This is a very interesting set of distinctions. The rhetoric of policy is at least as important as the science of policy. In general, today, the adjectives we use to evaluate events or people is over the top. Just think of how often the word “awesome” is attached to something that is merely very good like a dish of ice cream. The same seems to apply for things that are not good. The words “tragedy,” “crisis,” “catastrophe” etc. are used fairly readily to describe merely bad things. One might argue that these words simply no longer mean what the dictionary says they mean. There may be truth here. But I think people have lost all sense of proportion, of comparison with something other the past few years. Such people can be duped into almost anything.

  2. chidemkurdas Says:

    Yes, there is a tendency to react strongly to the immediate events. Partly it’s one of those inherent biases documented in cognitive research. But the human penchant to give more weight to the here-and-now is exacerbated with regard to financial problems, I think. For one thing, the media needs to sensationalize. Then there are politicians who have everything to gain from playing the knight-in-shining-armor, coming to the rescue amid disaster. All the more reason to highlight the horrors.


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