Hope may be getting too far ahead of itself

In my column of February 6, titled ‘Hope Could Be a Powerful Influence’, and of February 16, titled ‘It’s Time for the Next Step’, I ranted about how Fed Chairman Bernanke, the Treasury Department, Congress, the White House, and therefore the media, were driving consumer and investor confidence down further than it would normally be, with their endless doom and gloom assessment of the economic situation, repeated dreary explanations of how we got into it, and dismal predictions of how difficult it will be to get out of it.

I suggested that providing the nation with at least some hope and optimism, rather than endlessly stressing the negatives so people won’t expect too much too fast, could help a lot in influencing the market and the economy. Perception is of as much importance as reality.

The response was overwhelmingly derisive. “You think the American people should be brain-washed, rather than told the truth?” “Sure, just hope everything will be okay and it will be.”

I said it would be a shame to throw a couple of $trillion of tax-payer money into financial efforts to rescue the economy, which would depend to great extent on improving consumer and investor confidence, and then undermine the chances of success by continuing to emphasize the negatives, which was driving confidence into an ever deeper black hole.

Analysts in Europe were complaining that the recession in the U.S. had reached the stage of being 50% financial and 50% psychological, and U.S. leaders were doing nothing to address the psychological half.

Someone finally got the message.

It seemed to begin when Warren Buffett and a few other corporate CEO’s began making public statements criticizing the endless negativism, and expressed positive hopes for an eventual recovery.

Even though nothing at all had changed in the economy, looking as if they had all just come out of a coaching session, Bernanke, Geithner, Congressional leaders, the White House, and therefore the media, suddenly began projecting positives, such as that the economy could bottom late this year, and begin to recover slowly next year. That has picked up and it’s now that it probably will bottom late this year.

The government then promised to stress-test the banks and report publicly on their actual condition.

Previous doom and gloom assessments were also replaced with attempts to point out positive aspects of even the most bleak economic reports that continued to come out.

And here we are just a couple of months later, with the economy still in its most severe recession in 75 years and still declining, but with the stock market 35% higher than it was in early March, and investor confidence not only out of the black hole, but now able to believe the positive twists being put on the most negative of news.

For instance, investors were horrified in October when 157,000 jobs were lost, and terrified when 250,000 more jobs were lost in November – but were overjoyed with Friday’s report that ‘only’ 539,000 jobs were lost in April.

Equally interesting was that, accompanied by the gloom and doom talk last fall, investors were horrified and sent the market into freefall on news that major banks needed $10 billion, $20 billion, $30 billion in additional capital to survive. But this week, the stress-test report that 10 major banks will need another $75 billion to survive if the recession continues, and that 19 banks major banks will have a breath-taking $599 billion of losses if the recession lasts through 2010, was greeted as positive news.

Such is the powerful influence of hope and positive psychology.

But hope alone can only do so much without reality catching up to some degree, and right now hope may be getting too far ahead of itself.

A loss of 539,000 more jobs is not actually good news – it’s terrible news, and certainly not a sign that the recession is bottoming just because it’s fewer than the 699,000 jobs lost in March.

A bank stress test (certainly one designed to come up with favorable results if it had the goal of lifting investor confidence), that shows banks need an additional $75 billion in capital, and gives them 30 days to come up with a plan for how they will accomplish that, is not a positive – even though forecasts were that the report would be worse than it actually was.

The results more likely indicate that banks will have to conserve capital and resist lending out what they have for a long time yet. That is particularly so if the report by the International Monetary Fund that U.S. banks will need $275 billion of additional capital, is more correct than the stress test forecast.

It’s true that eventual economic recovery must begin with the rate of decline in the economic numbers slowing before they can eventually reach zero at the bottom, and then begin to turn up. However, the recent rates of decline from previously horrendous numbers to merely terrible numbers does not indicate that process has even begun, let alone that it is proceeding at a pace that will have the recession bottoming any time soon.

Just the rapidly growing number of mortgage defaults and foreclosures, credit card and commercial loan defaults, and reports that between 20% and 30% of home-owners are now underwater on their mortgages, while job losses continue at a fearful pace, is enough to question the level of hope that has now taken over – perhaps at the opposite extreme of the lack of hope in February.