The economy sometimes behaves like a bipolar personality disorder. Economic cycles can, at times, take the form of neurotic epidemics, anxious stampedes and financial fireworks displays that leave behind a trail of unsuspecting victims who dared to bet what they didn’t have, and who will end up footing the bill. At this point, responsible and honest communication, along with accurate and forward-looking information, could save us a great deal of trouble and money. What we need to ask ourselves is why we go on a spending spree without stopping to think, every now and then, about the risks we are taking. If we decide to do this exercise, we will find that things are far more complex than we initially thought, and that economic binges are here to stay. Sad, but true.
The workings of economic cycles can be compared to drinking alcohol at a party: there is a blood alcohol level that can facilitate social interaction, lower our inhibitions and even give us good ideas, as can be seen in David Vinterberg’s film ‘Another Round’. But once that level is exceeded – which, once the party gets going, is bound to happen – almost everything becomes a problem. Among these, getting up the next day.
We can also liken credit to a good drink. The easier it is to grant loans, the higher the blood alcohol level. And, although we are relatively rational creatures, when alcohol starts to take effect, it always creates a certain sense of euphoria. If we equate alcohol with money, we arrive at the concept of financial euphoria: there is always a moment when we are convinced that our investments, our financial gambles, will yield the best results, as if the scenario we construct in our minds were to play out exactly as we imagine in reality. And that is precisely when we are at our most dangerous – to ourselves and to others.
From this feeling of being delighted to meet each other, we move on to the financial bar and get more money (or more drinks). With these financial drinks, we snap up shares, property and foreign currencies that can only go up in value. We win, those who sell win, and the barman wins too – the employee of the ‘alcoholic bank’ who, for the moment, is offering an open bar for everyone. The night stretches from midnight to four in the morning. And the body begins to show signs of exhaustion. And intoxication.
Only those who know how to drink, whether by nature or through experience, will leave the party on time. Those of us who stay will keep partying on. When a lot of people have already left, the disco begins to take on the look of an after-party. The investors least informed, those drinkers who are reckless or naive, continue to drown in alcohol, and the financial assets acquired, those drinks of more, no longer feel the same as good.
There comes a point when the alcohol-fuelled bubble bursts and you’re no longer dancing as you’d initially imagined. You might even wake up next to a stranger who, just a few hours earlier, was the conquest of your life. The sun shines right in your face, filtering through a rickety blind in a shared flat. Everything you did in that state of euphoria now seems like utter nonsense. A sense of shame sets in: many investments were based on overly optimistic decisions and forecasts of financial results that are no longer looking so good.
To continue with the analogy, all those in debt who bought things that were not actually worth that much are now in a great deal of pain. They have become impoverished and cannot offload the houses, assets or currencies they acquired during the boom. They are no longer winners but poor investors. In this case, the side effects will last more than a year or two, often for a lifetime. This is what happened, for example, following the 2008 financial crisis, which made it clear that many of the investments and loans were of very poor quality. The hangover is still being felt today, with a sullen Parliament full of hatred and poor responses. A democratic headache.
Regulating alcohol has led to almost always negative consequences. Prohibition strengthened the mafia and the criminal trade in the United States. So the solution should go in another direction: it would consist of telling people that getting rich quickly is like a street party, an event which only a minority of elected representatives can survive successfully. And that one must tread with great care when night falls, because the shadows cast on the ground deceive us if we are prone to it.
Political courage should consist of this: being able to burst the bubbles, and thereby break the self-destructive tendencies of society, whatever the electoral cost; limiting the banking sector’s lending capacity during periods of euphoria in order to bolster it during periods of depression, when loans are most necessary and urgent; and in not being seduced by periods of easy growth, but rather seeking to encourage investment in the economic fundamentals that are most likely to yield returns in the long term.
To conclude, let’s imagine a night out that allows us to have fun and get home before two in the morning. It might not be what the films show, but it would let us enjoy a good night out without overdoing it to the point of regretting it the next day. It’s not the most exciting option, but perhaps it is the most sustainable. We need political and business leadership that seeks exactly that. And, unfortunately, everyone is currently shouting, glass in hand, gazing at the moon as if it were there 24 hours a day.
*Article written by Andrés Villena, lecturer in Applied Economics at the UCM
