Can Obama reverse the climate of fear?


With all the talk of numbers -- lost stock market value, rising unemployment statistics, multi-billion dollar bailout spending, and monthly cash burn rates -- it's easy to lose sight of a basic reality. Economies depend on people making decisions to spend, invest, and/or borrow, and people are motivated by many factors, including psychological ones. For the past year or so, the dominant psychological factor has been fear and depression.

When people are afraid, they are likely to do one of two things: freeze up and do nothing or make sudden decisions to sell stocks or mail their keys back to their lender. I would argue that markets move on fear both on the upside and the downside. During a period of rising markets, people are motivated by their fear of missing out on opportunity that others are grabbing. And during a period of declining markets, people are afraid they'll lose all their money -- which is where we are now.

It seems to me that president-elect Obama has a chance to do something important that could improve people's psychology. The problem now is that people are overcome by fear and the feeling that leadership is ineffective. If Obama can reverse the psychology -- make people believe that he understands the problem and will do what's needed to solve it (even if that solution costs a lot and will take a long time) -- then they will start to engage again with the economic system.

What kind of engagement? People will start to buy and invest, banks will start to lend, businesses will make capital investments, and venture firms will place bets.

I am not sure whether anyone knows if we've hit bottom economically, but I think if Obama can reengage people in the system, then things will improve. If he fails at that, then they will get worse.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

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