Wednesday, April 8, 2009

Economics and Social Psychology

"By the second half of the year we will likely see a recession trough and the beginnings of a recovery. Our projection of the recovery is very, very flat," Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, told the economics department on April 7.

Rather than bouncing back, the economy will more likely undergo years of slow recovery, said Lockhart, who is also a member of the U.S. Federal Open Market Committee. "I venture into the world of social psychology to help form a picture for that scenario. The argument that I would make is that there are fundamental changes going on in consumer attitudes in the country – that the attitude towards spending is actually shifting to a more frugal approach. And, very importantly, the capital market's facilitation of living beyond your means as a consumer has completely dried up. … The institutional framework that allowed people to spend more than they earned will not come back for a number of years."

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