Financial Crises and Meltdowns

Crises and Meltdowns as Psychological Events

Financial crises and meltdowns are usually treated as economic and political events. They are discussed in terms of falling stock prices, currency devaluation, asset depreciation, institutional collapse, regulatory and legislative reform, and so on. But financial crises and the meltdowns of financial markets and institutions are ultimately social and psychological phenomena—that is, they are symptomatic of stresses, trends, and transformations in society. Specifically, they express changes in people's thoughts, feelings, and behaviors about traditional order.

The heights of material comfort that have been experienced in capitalist societies during the past few hundred years have reinforced the timeless search for some formula, some secret, some mechanism that will allow people to acquire increasing sums of money. Driven by the profit motive as the means to realizing a free and equal society, the idea that individual economic activity must therefore be promoted without restriction is expressed in the belief that wealth can be—and has been—created, on one hand, by “honest work” and, on the other hand, with little or no effort. It is through such beliefs that financial crises and meltdowns eventually materialize.

The conventional understanding of financial crises is that they are a reaction to excessive speculation spurred by an overexpansion of credit, in keeping with Karl Marx's writings about capitalism as an exploitative economic system. But the 19th-century [Page 270]French economist Clément Juglar provided the earliest adequate explanation of modern business cycle theory. Juglar's analyses of crises in France, Britain, and the United States showed that a period of prosperity, with its prices ever rising beyond typical levels, is regularly followed by crisis and then liquidation of assets. An eventual recovery begins after a period of stagnation has created the conditions for low prices and reduced interest rates. Not too long thereafter, the cycle begins again, as the economy enters a new phase of prosperity enabled by easy access to credit and fueled by fresh, unrestrained speculation.

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