Econ 101: Don't panic
9:02 p.m. Wednesday, September 17, 2008
In the past three days the stock market has lost more than 800 points.
Banks that survived the Great Depression have crumbled and been bought out.
The government just performed the largest bailout in history for American International Group (AIG).
The news is concerning for many Americans, but Washburn University economics professor Dmitri Nizovtsev says the worst thing to do is stop spending money.
"That would be the worst thing because that's when the economy collapses," Nizovtsev said.
The stock market is based heavily on consumer confidence.
If investors think consumers will spend money, stocks are strong. But if investors think consumers won't spend money, that's when we see bad days on Wall Street.
If ordinary people stop spending money, we could be in for even more bad days.
"Many bad things in the economy in the past were caused by people, regular people, overreacting," Nizovtsev said.
He points to the dot-com boom of the 90's as an example, when many people became overconfident in the rise of the internet.
"Even though people were warned about irrational exuberance," he said, "no one listened to that and then in 2000 and 2001 we had this problem."
It's the same thing that happened in the housing market. Still, in the wake of all this alarming news of bailouts and bad stocks, what should you do?
"As silly as it sounds, I'd say nothing different from what they were doing," Nizovtsev said. "I think people should keep going with their lives, keep living their lives the way they did before this alarming news."
Nizovtsez says ups and downs in the economy are cyclical and he does expect the economy to rebound and actually get bigger. Of course, that will only happen if people don't panic.
Post a comment
(Requires free registration.)