Archive for July 27th, 2008

Pessimism doesn’t pay …

My dad is an eternal optimist, one of those turn-lemons-into-lemonade people. And yeah, it sometimes annoys the living shit out of me.

I am, after all, an in-the-long-run-we’re-all-dead type of guy, a devout half-empty man (I’d call myself an eternal pessimist, but I don’t believe anything lasts forever :) )

Clearly, if optimism is a genetic trait, it skipped a generation. In my life, I fear the worst. It’s what I do. A headache is a brain tumor. A bumpy plane ride, a crash landing. An abandoned suitcase, a ticking bomb. A lover’s quarrel, a relationship killer.

For a long time, I believed pessimism – in addition to providing the most efficient route to being pleasantly surprised – was also the more appropriate mindset for the modern world. You look around and see the Earth in peril. You see bad things happening to good people, and good things happening to bad people. You see a holy war in the Middle East that never ends, and social security reform in the U.S. that never begins.

You would think that this year, especially, pessimism would be the way to go, what with the U.S. economy teetering on collapse (I put the odds of a multi-year recession at about 50 percent, and of another depression at 10 percent).

But I’ve recently decided that dad was right all along. Pessimism doesn’t pay – literally. And here’s why:

1. Pessimism can actually help lead to the worst-case scenario…

Phil Gramm took a lot of criticism recently for suggesting the American media and public should stop whining about the economy, but negativity can absolutely contribute to, prolong, or intensify a recession. That’s why economists pay such close attention to consumer sentiment surveys – psychology matters. People who think the economy is turning south will act more cautiously, spending less and saving more, which ends up causing more weakness and creating a vicious circle.

A negative outlook can be self-fulfilling in other areas of life as well. I often find that people who dread bad things happening avoid taking the positive proactive measures that could prevent those things from happening, and even at times engage in destructive behavior that increases the likelihood of a bad outcome.

2. However, the worst-case scenario rarely happens…

This weekend, Congress decided to pass a housing bill that helps homeowners facing foreclosure restructure their mortgages and stay in their homes. The bill also has provisions to bail out Fannie Mae and Freddie Mac, the government-sponsored private entities that handle more than $5 trillion in mortgages and helped create the current mess by making loans that should have never been made in the first place.

In an election year, the housing bill was a political inevitability, and probably an economic necessity as well since Fannie and Freddie are indeed too large to fail. The bill has some decent aspects to it, such as the regulation forcing lenders to be clearer about the true costs of a mortgage, and it could help stabilize the moribund housing market.

But the bill is also a travesty because it encourages future risky behavior by reaffirming and institutionalizing the idea that the government will always be there to bail you out. As a recent article in The Economist noted, a government bailout is about privatizing profits and socializing losses, which sucks for people like me who continued to rent partly because I thought the market was overheated, and yet as a taxpayer will end up paying more than a fair share of the bailout costs.

The bill may be a bad one, but it also proves the point that in life, people facing dire outcomes can often rely on the support of loved ones, like friends and family (or a generous government), to help them avoid a bad situation or at least make a bad situation more manageable.

So usually, all that worrying and pessimism accomplishes nothing except for perhaps, say, preventing someone from buying a home in Manhattan that likely would have almost doubled in value by now (pessimism may not pay, but bitterness is groovy)!!!! …

3. And if the worst-case scenario actually does occur, you probably have other things to worry about … or you have nothing to worry about because you’re dead.

My grandfather always said he would never buy stocks because of what happened in the Great Depression. Meanwhile, for the rest of his lifetime, America never had another depression, and the stock market rose by thousands and thousands of percentage points. He basically guaranteed he’d never be rich just so he wouldn’t be desolate.

That’s why I tell almost everyone who has at least ten years to invest to put a nice chunk of their money in stocks or mutual funds. In the long run, the market should be one of the best places to put your money. Yeah, at some point, the American empire is going to come crumbling down, and/or the world will end, but you’re going to have a lot of other concerns if that happens.

I mean, if this current situation does become economic Armageddon, do you think that shoebox of cash under your mattress is really going to do much good? If the economy has gone to hell, those dollars probably won’t be worth much anyway, especially if this time inflation ends up being part of the problem. Sure, that money may buy some loaves of bread for a few more months, but life is still going to suck…

And the same is true in other areas of life. I mean, what’s the point in worrying excessively about nuclear weapons or terminal cancers when being correct basically means you’re dead???

As I see it, pessimists will always be right because eventually shit happens and everything good ends, but in the meantime, the optimists will be having all the fun. So i might as well bring my half-filled glass of lemonade and join the party.


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