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This chapter is from the book

The New McFear

When some of the world's largest companies and banks essentially vaporize or are forced to sell themselves in a matter of months, and the global economy appears to be sinking with record speed and harmony,6 even the worst-conceived plans and the best-laid expectations can turn to fear, and suddenly no fear, for some of us, may seem irrational. In October 2008, Alan Greenspan, the former chairman of the U.S. Federal Reserve, confessed to Congress that he was "shocked" when the markets did not operate according to his lifelong expectations.7 When things are tight and negative, economic news fills the headlines; people may tend to hold back on spending, pull money out of long-term investments, and potentially exacerbate the problem by holding onto their nest eggs for dear life. During the Meltdown of 2008, Bill Gross, considered the nation's most prominent bond investor, hypothetically equated the squeezed credit markets to being like a trip to a McDonald's drive-thru where one would pay at the first window, but could not be sure of actually getting their food at the second window. "They are frozen in 'McFear,'" said Gross.8

In a crisis, no story in the media seems out of bounds, which is why the media stokes fear. Case in point, remember the Avian flu, better known as the bird flu? In 2005, it was reported that an outbreak of the bird flu could kill anywhere between 2 million and 150 million people, but as of this writing there have been only 263 reported deaths caused by this disease.9 Although the bird flu was indeed potentially dangerous, a measured, informative public discussion of the potential pandemic seemed nowhere to be found in the mass media. In the meantime, something much bigger was taking place, something that takes place every day, every month, every year in America, and yet it gets scant coverage as a rule. That something? The flu. That's right, the average, ordinary flu that we've probably all had a touch of at one time or another. In a flu season in the United States, an average of 36,000 people die of the flu or flu complications, and about 200,000 people are hospitalized.10 That's more than 98 fatalities a day and well over 500 hospitalizations a day if the flu season were spread out over a year. Fortunately, bird flu hasn't come anywhere close to exacting that kind of toll, but as we all know, fear sells, and our perception of fear becomes reality.

As our economy suffered its own kind of flu, the headlines got worse and behavior became more irrational. After all, the economy is not only affected by the way people behave with their money, but it also affects the way people behave with their money. An example of this self-fulfilling prophecy is the hot dog stand story, which has been told in one form or another for well over 40 years. Here's the tale: Once upon a time, there was a man who ran a hot dog stand. This man ran one of the finest hot dog stands in the whole city and, strangely enough, he even used real meat in his sausages. People came from miles around to get his tasty hot dogs that were generously covered in onions and sauces. In fact, the man was so successful that he could afford to send his son to an Ivy League school. After graduation, the prodigal son came back home to visit his pop and took a look at the family business. "Dad," he said, "based on the current economic statistics, we're heading for a recession. You should really stop using all that sauce, and you dish out onions as if they were free. And you've been talking about expansion—adding another hot dog stand. Not the time to do that, Dad," he said. The father was torn. He was always generous to his customers, but his very bright son didn't get all that education for nothing. So, reluctantly, the father cut back on the sauces and onions. He held off on his expansion plans. His son even convinced him to buy a cheaper brand of hot dog. Although the son meant well, the timing of these cutbacks turned out to be just right, because right then the father's business took a real dive. After years of prospering as a street vendor, the hot dog man lost so many loyal customers to the competition, he had to close his stand. The moral of the story: The more you react to the fears and emotion of a recession, the more likely the recession will find you. Or...what was the son thinking and what was the father feeling?

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