In 1936, John Maynard Keynes published his masterwork “The General Theory of Employment, Interest amd Money”. His primary message was a discussion of how governments could borrow and spend to effect economic goals. He also introduced the the notion of “animal spirits”, those “spontaneous urges to action” that are a part of human nature. In the “Wealth of Nations” Adam Smith had spoken of a “rational perfect market that was guided by an invisible hand”. Keynes believed that life and economics are not that rational and the excesses of human nature introduce instability into the world of commerce. Many people are currently reintroducing Keynes’ ideas and believe ” classical Adam Smith economic models do not tell the whole picture”. How else did all the economists miss the current credit and real estate mess?
If Keynes notions are a better description of the marketplace, how would that affect our view of the current real estate market? It might help us understand the emotional excesses witnessed over the past decade, an overabundance of optimism followed by a depressing cycle of pessimism. If the marketplace is the sum of all human emotions, it might make us more aware of the tell tale signs in our immediate environment. We all witnessed many people receiving loans that were ” out of bounds” but did we really understand the potential consequences? When everybody is on the “emotional bandwagon” whether it is overly optimistic or pessimistic, it is difficult to stand aside and attempt to “see” what is really happening.
In difficult economic times individuals and families are placed under great emotional stress. None of us know what will happen in the future, and be wary of those “talking heads” who love to tell us what will come to pass. Understanding and accepting the impact of emotions and stress is a good first step. A second step I recommend is a deep breath. Take your time when making important decisions and accept the fact that the “animal spirits” are with us always. We just need to strive for an awareness as best we can. Wisdom knows no time frames as Aristotle said ” moderation in all things.”
Ben’s recommended books. “The Big Short”, Michael Lewis; “Animal Spirits”, George A. Akerlof and Robert J. Schiller