Gross: The Dangers of Economic Happy Talk

Having difficulty coping with financial stress? Forget Bernanke & Paulson. Think Rodgers & Hammerstein. In the excellent production of "South Pacific"at Lincoln Center in New York (something tells me tickets there will be easier to get soon), one of the highlights is the song "Happy Talk." "Happy talk, keep talking happy talk," sings Bloody Mary. "Talk about things you like to do." Elsewhere in New York, there's a sense afoot that the real problems we face aren't the crippled financial system or the slowing economy, but rather all the bad stuff people are saying about them. In other words, not enough Happy Talk.

To ward off panics, financial media organizations are keeping Un-Happy Talk to a minimum. "We're very careful not to throw words around like 'meltdown' and 'free fall'," CNN correspondent Ali Velshi, who is getting mucho face time thanks to the meltdown and free fall, told The New York Times. The Rupert Murdoch-owned Wall Street Journal is engaging in un-Murdochian restraint, banishing words like "crash" and "pandemonium." Maybe I have a limited vocabulary, but I'm not sure how else to characterize a month in which the country's largest financial institutions, Fannie Mae and Freddie Mac, had to be nationalized; Lehman Brothers, the fourth largest investment bank, filed for Chapter 11; AIG, a component of the Dow Jones industrial average, turned over most of its stock to the government in exchange for an $85 billion loan; the Treasury Department had to guarantee money-market funds to stop people from hoarding cash under their mattresses; gigantic Washington Mutual collapsed, the largest bank failure in U.S. history; and the nation's greatest financial minds have declared that a bailout the size of the Netherlands' GDP is needed to stop the bleeding. Yes, we have to be careful about crying "fire" in a crowded theater. But calling Wall Street's meltdown a meltdown is more like crying "fire" in a crowded inferno.

It's one thing for media organizations to censor themselves. It's quite another for the government to ban certain types of speech. Short-selling is the practice through which investors borrow shares from one another, sell them hoping or expecting the stock price will fall, and then buy the stock back at a lower price and return it to the original owner. Shorting stocks is an essential component of hedge funds' strategy; it's how they manage risk. But just as the last refuge of scoundrels is patriotism, the last refuge of incompetent CEOs is short-bashing. (They always believe shorts conspire to spread rumors and drive their stocks down.) "I will hurt the shorts, and that is my goal," Richard Fuld, chief executive of Lehman Brothers, said last April. Instead, he delighted the shorts by running the company into the ground.

Short-sellers don't kill companies. Managers do. But in late September the Securities and Exchange Commission banned short-selling of financial and finance-related stocks. The bucket list—companies that might kick the bucket if short-sellers were able to operate—now includes nearly 1,000 stocks, including the drugstore chain CVS. It also includes two publicly traded hedge funds. In other words, you can't bet against the guys who are now forbidden to bet against stocks. Joseph Heller, call your agent.

What's wrong with this? Economists tell us that a stock price is nothing more than the sum total of information about a company and its prospects. The trading day is thus a debate in which people express favorable opinions (by buying the stock) or negative ones (by selling the stock). Banning short-selling is like telling debaters they can only argue one side. It's like wholly disregarding half of the extant opinions. It's like Fox News.

The third set of Happy Talkers are incumbent politicians, who frequently laud the craftsmanship of the foundation even as the edifice crumbles. The past year has shown plenty of evidence of unsound fundamentals—eight straight months of job losses, the failure of financial institutions, etc. And yet the word from Washington (at least the Fox News-watching half of Washington) for much of 2008 has been that things are just fine. "The fundamentals of our economy are strong," as President Bush said in August.

There's nothing wrong with trying to bolster confidence. But if you ban pessimism as a matter of course, it creates a false impression, which makes the fall all the more shocking and disorienting. Putting on a happy face too frequently can also make it harder to rally the troops in a time of crisis, as management guru John Kotter writes in his new book, "A Sense of Urgency." Which is why Washington policymakers have had to dial up the fear factor to light a fire under Congress (note the dour tone of President Bush's address last week). A few weeks ago the fundamentals were sound. This week, if you tuned into C-Span, it looked as if we could be staring at a replay of the Great Depression.

No. The source of our current angst and distress isn't a surfeit of recent negative talk. To the contrary, several years of excessive Happy Talk, and an acoustical system that dims the voices of contrarians, have been important contributing factors. An environment in which discouraging words are seldom heard may be fine for a place where the deer and the antelope play, but not for the frenzied range where the bulls and the bears roam.

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