The Unconscious Psychic Dimension in Financial Panics

Dear Editor,

When I studied group-fantasies of stock markets as revealed in cartoons at the beginning of this year, I got the impression that financial markets basically live in a state of permanent paranoia. The paranoia is defended against in two ways: mania and depression. During the manic phase, the group unconsciously identifies with the rapid growth one expects in a newborn, helpless baby, while also unconsciously warding off anxieties of abandonment from infancy. Stocks or corporations are unconsciously loved as omnipotent deliverers of ever-growing earnings which leads to irrational overvaluations of stocks. Group members are allowed to have fantasies of grandiosity without being punished for demanding too much. Psychotic anxieties are appeased by the strong, nurturing socio-economic environment.

Often at the end of manic phases, however, fantasies of omnipotence — for example, the perception of invulnerable stock markets — hide an equal amount of unbearable pain such as the fear of abandonment, that the lavish growth and security will not continue. Then an insignificant event can cause a breakdown of the manic defense, and growth anxieties cause the mania to alternate with depression. This is reflected in the mini-crashes in global currency and stock markets that occurred in late October. Hong Kong stocks fell 10.4% on October 23 and in New York the Dow Jones Industrial Average lost 7.2% on “Black Monday II” on October 27. Subsequently, Wall Street may have found some relief because anxieties were refocused by mounting tensions between the U.S. and Iraq. On the periphery, however, “continued aftershocks … rocked investors in Hong Kong and Brazil” (Wall Street Journal Europe [WSJE], November 11). The headline read, “Growth-Crazy Brazil Slams Its Economy into the Deepfreeze.” Growth that is seen as excessive, or crazy, causes the anxiety. Only by cooling off, or deep-freezing, the torrid growth, can the anxiety and the financial crisis be overcome. Those economies whose growth was perceived as the most excessive were the targets of the most aggressive attacks by the frightened traders and investors. The unconscious growth anxieties are responsible for dramatizing overreactions in the financial markets which show in the panic flight of the investors and may lead to

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draconian policies in the real world of these peripheral “excess” economies.

During a depressive phase, society, of which the investors are a part, compulsively identifies with the aggressor against the growing financial markets. Growth becomes dangerous because it arouses unconscious feelings of loss, diminished self-esteem, anxiety, and rage that are projected back onto it. The group begins to attack the hated growth, to plot to produce situations of decline and insecurity. The Wall Street Journal Europe reported “Brutal Attacks on Currency” (October 24, emphasis added throughout) when the October period of instability began in Hong Kong. Or, traders are seen “slicing the size of their bets…” and “slashing the amount of borrowing that they have been using to support those positions” (WSJE, November 11). In another quotation, the growth and the attack are explicitly connected: “Economic growth used to be a religion in this vast nation [Brazil], even if it came at the expense of rampant inflation and inequality. But now, facing a withering speculative assault on its currency…” (WSJE, November 13). Values are wanted and caused to fall, collapse, or even to vanish, through depreciation, devaluation, and deflation. Deep fears of abandonment are acted out in the real world. The very day, October 27, when Wall Street had its 7.2% drop, the following loss fantasy could be found: “`People are walking an emotional tightrope out there,’ said Richard Bernstein, head of quantitative analysis at Merrill Lynch. `It’s hard to know how to react when you see gold falling $16 (an ounce) in a single day. The fear that all asset values will follow it down was what really rippled through stocks’ Friday in the U.S. stock market where the ‘Dow Jones Industrial Average tumbled 132.36 points, or 1.7%, to 7715, bringing its two-day loss to 319.24 points’” (WSJE). Another loss fantasy is this one: “More than that, they [stocks] are being dumped. ‘People are trying to get out of Greece, Russia and Latin America, particularly Brazil,’ says the head of proprietary trading at a U.S. bank in Tokyo. `It’s liquidation no matter what the price’” (WSJE, November 11). The resulting temporary or prolonged retreat of stock and other asset prices, for example, real estate, creates a situation of widespread insecurity because a fall in markets often tends to generalize throughout society. It is difficult to avoid losses and find safety, financially or otherwise; no investor, nobody, is secure.

Thus, a period of economic growth — which is supposed to be a period of fairness as well, where people in general are not willingly abandoned or hurt — leads to a period of economic decline where the rights of the people are neglected, where even civil war may result, and, especially, where scapegoats are put in a situation of total insecurity and even physical danger. This is because authoritarian personalities unconsciously get anxious and angry when they perceive too much economic growth and progressive social change. For example, this was the reason for the unconscious support by right-wing intellectuals of the scapegoating policy of the Third Reich. Having grown up in a culture that didn’t support the growth and development of infants, they were under the pressure of anxieties of abandonment when they perceived the enlargement of the rights of citizens during the Weimar Republic. Such widespread anxieties are central to explaining the upsurge of Hitler and the approval of his policies. Authoritarian people demanded the abandonment and punishment of scapegoat groups, especially the Jews. Scapegoating gives relief from unconscious anxieties. Anti-Semites typically have an authoritarian temperament and a general preference for scapegoating, mobbing, and worse. So, it was the unbearable pain caused by social progress, and not any quality of the victims, which was responsible for the murderous rage of the Holocaust.

The recent currency devaluations and stock market panics in Southeast Asia have led to speculations in the popular business press about incipient deflation, no longer just disinflation. The world last experienced the devastating deflation of a great depression some 60 years ago. Devaluation and deflation are ways of liquidating asset values, and of hurting and ultimately killing people by indifference (as, for example, to the plight of the Jews in Nazi Germany during the thirties and forties). During asset depreciation in a depressive phase, inflation anxieties and severe tensions arise in financial markets and in other parts of society whenever there are signs of economic recovery or when political authorities consider growth-supporting strategies. These unconscious growth anxieties disappear when the deflationary course becomes reconfirmed as a consequence of renewed

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downward pressures on prices. It is under the weight of these unconscious deflationary pressures of the group that the authorities, acting as group delegates, make mistakes. They apply the wrong strategies — such as increased interest rates, trade barriers, or onerous reparations — which cause further economic deterioration. For example, “the Fed [the U.S. Federal Reserve] went horribly wrong after the stock market crash in 1929, when it raised interest rates and allowed the money supply to shrink. Between 1929 and 1933, prices fell by almost 30%” (Economist, November 15). If the authorities acted constructively, they would just lose their jobs or not be re-elected. But by acting destructively, they can cause catastrophes. The Holocaust could be seen in a line that begins with the Great Depression at the end of the twenties and stops with the end of the Second World War. From a historical perspective, those three sacrificial processes have in common that all of them provided an enormous amount of victims.

Florian Galler

Swiss Branch of the Institute for Psychohistory

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