Investor trauma will delay market recovery
Most of us have someone in our extended family - a grandparent, great-uncle or aunt - who remembers the worst days of The Great Depression. These are the resolutely frugal people who eat every leftover, save wrapping paper, and take very little risk when it comes to spending, debt or investing.
As we grapple with the dimension of the current economic collapse, arguing whether it's a recession or a depression, the example of these folks has become an important forecaster of what sort of long-term damage the financial system may be incurring. That's because research shows that financial decisions are heavily and permanently influenced by past experience. In other words, there's a good chance that the children of those who've lost their homes or jobs, had their savings wiped out - or any related financial trauma - are likely to be extremely cautious about everything in future.
It's not entirely surprising, but it does mean that anyone who thinks we're ever going to return to the free-wheeling days, has at least a generation or two to wait for it to happen. Our collective threshold for risk - which is what makes equity markets and other financial markets go around - has been dealt a major blow. That has profound implications for the way that businesses raise capital, fund growth, make acquisitions - all the things that tend to create jobs and prosperity.
For the foreseeable future, fear trumps all. Including greed.