One of the most resonant quotes of the ongoing financial crisis was actually uttered 77 years ago, when Franklin Delano Roosevelt assured Americans during his first inaugural address, "The only thing we have to fear is fear itself."
That sentiment remains the operational philosophy of the federal government. When bankers panicked last year and stopped lending money, the government stepped in to take its place. When markets looked ready to crumble, the government shored up confidence by guaranteeing trillions in private investments. As President Obama put it in his State of the Union speech last night, "We do not allow fear or division to break our spirit."
But is fear really what we should be afraid of?
Fear certainly seems like an unambiguously bad thing. Not only is it unpleasant, but it can feed back on itself in self-perpetuating spiral. As I write in Extreme Fear, the physical symptoms of anxiety - a pounding heart, shortness of breath, cold sweat - can be so upsetting that they spiral into a full-blown, incapacitating panic attack. Fear can keep us cowed and defensive and lead us into depression. To banish these symptoms, tens of millions of Americans take antidepressant and anti-anxiety drugs.
While it's certainly terrible to be tormented by unbearable feelings, a growing faction within the psychological community argues that negative emotions are not necessarily pathological. Taken in context, they can be powerful tools to enhance our survival. Appropriate fear, for instance, motivates us to avoid situations where we can come to harm. (You wouldn't want to pop a soothing Valium while a burglar is breaking down your door). And University of Michigan psychologist Randolph Nesse suggests that depression, too, can have powerful benefits: When things are going badly for us, depression impels us to stop what we're doing and think about our situation. If your attempts to pick up women fail time after time, for instance, maybe you should become depressed - it will stop you from using corny pickup lines.
By the same logic, it may be a good thing for economies to be depressed from time to time. Speculative bubbles lead to wildly unproductive behavior that needs to be stopped. In a depression, financial resources are moved away from unproductive activities - like writing doomed mortgages - and, eventually, reallocated to things that, hopefully, make more sense.
Current government policy does not see virtue in depression, though. On the contrary, the goal has been to do whatever it takes to banish fear and get people smiling again. In March, when mark-to-market accounting rules were under fire from the financial industry because they forced banks to value their troubled assets for what little the market was willing to pay for them, Federal Reserve Chairman Ben Bernanke signaled that the rules would be loosened. Banks would be free to choose happier valuations for their toxic assets. At the wave of a wand, net losses were turned into profits. Bolstered by this news, bank shares rallied. Citigroup's more than doubled in two weeks.
Similarly, when the government's much-heralded stress test showed that some of the nation's largest banks would need tens of billions in extra capital to weather the storm, outraged bank executives forced the government to scale back the estimates so that its fiscal seal of approval would be easier to obtain. The day after the government released its sunnier results, bank stocks soared.
Many could argue (and have) that the federal government's leadership has done just what it set out to do. It has restored confidence in the system. And that confidence will lead to a virtuous circle. Optimistic investors will start investing, optimistic consumers will start spending, and soon a revitalized economy will start adding jobs and boost the housing market. Everything will be okay. We should be happy.
Sometimes, though, happiness isn't appropriate. Psychological researchers have found that depressed people tend to be more accurate in how they perceive their situations, a phenomenon dubbed "depressive realism." Compared to cheerful people, they tend be less optimistic about their own abilities and have more muted expectations of their future success. It's the people who are gazing at the sunny sky who walk into open manholes.
How would a depressed person see the current situation? More than a year after the start of the crash, unemployment is up, foreclosures are still rising, and the banks that were too big to fail are now bigger than ever. The officials who shepherded us into this crisis are still in charge, and their agencies are backstopping ever vaster, risky investments with the public purse. Dr Feelgood has given us plenty of painkillers, but done nothing to cure the fundamental problem: the need to reduce unsustainable levels of debt.
Depression and fear are unpleasant things to experience, but nature has endowed us with them for a reason - because they encourage us to avoid trouble and to learn from our mistakes. With all due respect to President Roosevelt, fear itself isn't all we have to fear. There are also manholes.