In his cultural memory talk, Timothy Geithner states that our most dangerous financial crises have followed periods of excessive confidence. His theory is that, when we lose the memory of former panic, we leave ourselves open to vulnerability.
In a moment of panic, the natural human instinct to protect oneself takes over. It is the collective impact of what's individually rational that makes economies vulnerable to collapse. The only way to break this panic is to convince people that it is safe to save and spend. Unfortunately, this tactic can lead to an inflated sense of confidence that allows us to take more risk. In other words, it is the belief that because the world is stable today, it will continue to be stable in the future.
Though our current financial crisis was caused in part by fraud, regulatory failure and predatory lending, the most damaging aspect was the power of belief.
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Timothy Geithner's Cultural Memory Talk Examines the Importance of Panic
- By: Vasiliki MarapasMay 29, 2014