Working throughout the weekend, the Fed helped broker a deal to bail out Bear Stearns. On the verge of bankruptcy, Bear Stearns will be acquired by J.P. Morgan for the bargain basement price of $270 million. Clearly, the Fed was hoping to stanch the hemorrhaging on Wall Street. But it had already rendered its judgment on Bear Stearns last Friday when its market value collapsed.
While the Fed's policy is surely well-intentioned, it is not likely to have the desired effect. The Bear Stearns saga highlights an important, but not always appreciated, fact about how we place value on things. Value is a quality that we assign to something based on what we think the future holds. We buy a stock not so much for what has happened in the past but for what we expect the company to do in the future. So when the market for Bear Stearns collapsed on Friday, it was a collective signal that effectively said, "Abandon hope!"
Hope is what gets us out of bed every morning. It is what impels people to toil in jobs that they would otherwise rather not do. It compels others to buy lottery tickets, and hope even makes us have children. All for the belief that things will be better in the future.
Hope, not the Fed, is the engine of the economy.
Unfortunately, the Fed's move doesn't go nearly far enough in restoring hope that the economy will improve in the near future. It smacks of desperation more than anything else.
So where does hope come from? The sources are varied, but as a neuroscientist, I believe that the final common pathway is through dopamine released in the brain. Until the early 1990s, the prevailing view of dopamine was that it was a neurotransmitter of pleasure. The research, both in monkeys and humans, has subsequently shown that dopamine is released well in advance of pleasure. In fact, dopamine seems to function primarily as a chemical of anticipation -- anticipation that something good will happen. When dopamine is released, it sets up the brain to do something, kind of like a fuel injector for action. Without dopamine, the person retreats into a state of inertia. Think Parkinson's disease.
So, the Fed's move, rather than stimulating the market, may have the opposite effect and grind it to a halt.
I hope not.