rowland manthorpe dot com

President Obama signed his economic stimulus plan yesterday. It’s the most massive recovery package ever seen. And one of its principal aims is the restoration of confidence. As Obama warned last week in his press conference:

Doing a little or nothing at all will result in even greater deficits, even greater job loss, even greater loss of income, and even greater loss of confidence.

This puts confidence on a par with jobs and income. That might seem odd at first, but it appears to be the general consensus. Certainly according to the entrepreneur Sir David Tang, who writes on the BBC website that “pessimism is the most serious cause of the global economic tsunami”. Even David Brooks agrees.

A contrary view comes from economist Kevin Hassett on Bloomberg News. According to him, confidence – or overconfidence – was the principal cause of the credit crunch. He blames the inflated sense of entitlement felt by the MBAs on Wall Street desk, quoting a study which equated narcissistic traits with leadership potential:

The results of the study had large implications for real-world settings, because “narcissistic leaders tend to have volatile and risky decision- making performance and can be ineffective and potentially destructive leaders”.

It may be that Hassett is referring to a different kind of confidence to Obama and Tang. He’s talking about personal confidence, they’re talking about consumer confidence. But it seems to me there must be a connection – otherwise why use the same word? So who’s right? Is confidence to blame; or is itwhat keeps the economy afloat?

Perhaps – and this is just a thought – both are right. Confidence does drive the global economy. But, like capitalism itself, it is fundamentally volatile. When the going is good, confidence is the rocket fuel of innovation and entrepreneuralism. But it always overreaches, because it is based on a faith in the future that can never be fully realised.

Not evidence for this, but a sign of something: the State Street Index (below) shows a record jump in global confidence in February:

I would ask if the world has gone mad. But I know the answer to that already.