Hi all,
Love the site, thanks to the webmaster and the posters for making this such a useful resource. Finally got round to my posting I know something about!
As some people may recall, I am a psychologist and have recently found the psychology of economics, particularly bubbles and crashes, very interesting.
I would love to see a crash as I'd be able to buy somewhere for my wife and, hopefully eventual, children can reside and call "our own". The Mrs (got married a month ago!) is a medical doctor and I am a researcher, so we don't exactly earn bad money. Thought I'd declare my interest for the sake of openness etc
I remember what interesting threads the last psychology ones were, however, I can't recall exactly what I said then!
I think I said something along the lines that people's beliefs about the world lead to certain (widely acknowledged in cognitive psychology) "information processing" biases. These biases mean that people are unable to take on new info, viewpoints, etc. This would therefore help the formation of a bubble with millions sucked in - people fail to see other arguments, prefer a rosy outlook etc etc.
Thus far, despite the concerns raised by academics and posters here etc etc, no concrete evidence of the crash ITSELF has yet occurred or been acknowledged in the media; in fact, when there were signs of a dip, this was countered immediately by another report from elsewhere. When I speak to otherwise sane friends and contacts, the vibe is still that property isn't going to fall, and if it does it won't much. Thus, I can see this bubble growing, at least for several more months.
By 2005 the autumn of 1989 will be have been over 15 years in the past. That is, to use almost biblical language, half a generation. At least in 1989 there had been a small blip in the early 80s, plus two crashes in the 70s. Now my peer group can't even recall the 1989 crash much, and I am not sure that they would associate that crash with the early 90s recession.
Now all this has been mentioned before by various posters in various threads. My point is this. A prominent psychologist (called Janoff-Bulman, if you want to do the lit search!) came up with a pretty powerful idea in the 1970s/80s, that of "shattered assumptions". It's really the idea that all kinds of emotional problems arise when peoples widely accepted assumptions get seriously threatened, e.g. thinking that "good things happen to good people", then get seriously beaten up one night and put in casualty with a fractured skull, for no apparent reason.
My view is that, to put it bluntly, people in the UK are soft, and the younger generation (of whom I am a member) have no idea about "rainy days", let alone serious macroeconomic hardship, they have no savings, and assume that going to uni or college will get you a decent job and you'll never be unemployed for a significant period. I therefore believe this bubble will grow some more (there is obviously no point about trying to predict the downturn anymore; you're setting yourself up for derision, even though your logic might be ultimately valid), but once it does start to go under, people may well properly lose their rag and do crazy stuff.
This psychological theory was applied mainly to how inidividuals handle traumatic events, but (and I wouldn't be surprised if psychologists have investigated this) it can also be applied to large groups. Think of "9/11" and what it did to the American psyche. They flipped, and I am not sure that they have properly calmed down yet. At least now they have been "vaccinated"; another terrorist attack wouldn't freak them out nearly as much, even if it is more serious, as the illusion of absolute safety has disappeared.
Think about the UK - millions have "invested" in expensive homes, university educations, cars, and have loads of credit card debt. The assumption is that all this will be helpful in the future. Don't worry, you'll always be able to do something, property always goes up, you're a graduate, etc etc - all this myths could be shattered in a very short space of time, and then people will be very, very emotive indeed. People might like homes, but I wouldn't be surprised if they appreciated their outlook on life even more.
Now, obviously, I think this does tally very much with the idea of an undershoot. When people's confidence goes, spending will stop quite quickly, and since that has been sustaining our economy, the economic problems will certainly hit. But I think the wider knock-on effects will be huge. The country will be panicked. Politically, it will be a disaster for the Labour party, as they have sold us the idea that we can have a cake and eat it (i.e. public spending and safe economy). My ultimate fear would be that extreme parties would start to do well, as people search manically for answers.