Better Start Working on Your Bernanke Costume


Over at EconLog, Bryan Caplan gives advice on how to scare small children. This comes naturally to him, since he's an economist.

For maximum fright, Caplan suggests starting early, with vague warnings of a monster in the neighborhood and the terrible deeds it has done, so that when you jump out from behind something dressed like the monster, the kid is primed for maximum freak out. His point, of course, is that scaring kids is awesome. Oh, sorry. Actually, his point is this:

If you think that the recent stock market crash was a psychologically-fueled "panic," it is quite likely that Paulson-Bernanke's pre-crash fear-mongering was the crucial factor that sent investors over the edge.  If P-B had gotten hysterical without warning, the world might have just laughed at them—and expected them to retire to "spend more time with their families."

There's a huge psychological component to market movement, and the it's-all-in-your-head-but-it's-in-everyone-else's-head-too-so-you'd-better-SELL! angle is always worth keeping in mind.