By Bryan Caplan
Last week was the most plausible example of a psychologically-driven financial panic that I’ve ever lived through. I have to think that most of the people who sold did so because they were scared by falling prices. Falling prices, in turn, scared people. At risk of sounding like a pop psychologist, the result was a scare spiral.
Admittedly, the fact that you’re paranoid doesn’t prove that “they” aren’t after you. Maybe all this fear-driven selling is just bringing the market back to where it belongs. But I’m skeptical – I think last week was noise trading run amok.
In any case, suppose I’m right. What then should we think about Paulson, Bernanke, and Bush publicly freaking out in the weeks before the panic? What should we think about all the voices warning about “the end of the world”? While there’s no way to know for sure, isn’t it at least plausible that in the absence of this high-profile doom-saying, last week’s panic would never have happened?
Questions: Am I on to something? Or does this line of thinking lead to the Dark Side?