The sunny side of pessimism

From the Declaration of Independence to the space program, optimism was traditionally something of a core American value; however, it is one that has taken quite a beating in recent years.

Not too long ago, an NBC-Wall Street Journal poll found that 76 percent of Americans lack confidence that their children will have a better life than they do. That is a stunning reversal from the onward-and-upward America in which baby boomers were reared. Then again, the optimism of the baby boom generation atrophied into a dangerous complacence which has been bad for the economy in general and for household finances in particular. The following are some examples of how this complacence has led to trouble, and why the new mood of pessimism might actually be constructive:

1. Consumer confidence is the key to economic growth. To this day, consumer confidence figures are closely watched for signs of where the economy is heading. There are two flaws with this. The first is that there is something of a chicken-or-the-egg relationship between consumer confidence and the economy. Does confidence really help boost the economy, or do people simply feel more confident when they are experiencing stronger growth? The more damaging flaw is that the emphasis on consumer confidence presumes that the only problem with household finances is people’s attitudes. This ignores the reality that non-mortgage consumer debt is at an all-time high. People not only do not have the means to back up their confidence, but too much optimism right now might actually make the problem worse by encouraging people to borrow.
2. Investing for the long term will fund retirement nest eggs. Faith in the hefty market returns of the 1980s and 1990s led professionals such as pension consultants and personal financial planners to plug overly-optimistic assumptions into their retirement funding projections. These high assumptions created the illusion that retirement plans were on track toward being fully funded, which allowed people to skimp on their contributions to those plans. All concerned were slow to revise their methods, reassuring themselves that future returns would make up for a disappointing year or two. Now, nearly 15 years into a century of unreliable stock market returns and low single-digit interest rates, reality is starting to seep into those retirement assumptions. People may not like it, but it will force them to fund their retirement plans more realistically.
3. Next year will be better. The annual raise and possibility of a bonus were long staples of the American worker’s career. It was okay to overextend the credit card, sign up for a mortgage they couldn’t quite afford, or put off saving for retirement because rising salaries would soon ease those problems. Now people are considered lucky if their wages keep up with inflation; many had to take a step back in pay as a result of the last recession. This harsh reality should encourage people to make their financial commitments based on resources they know they have, not on those they hope they will have in the future.
4. Housing is an asset that appreciates over time. Banks and home buyers alike thought it was perfectly fine to forego down payments and borrow heavily against home equity because rising home prices would soon build up a healthy equity cushion. When it turned out that prices could in fact go down — and stay down — banks and homeowners alike found themselves over-leveraged and under water. A more conservative approach to mortgage borrowing should lead to a more stable housing market.
5. Education is the answer. Yes, education can open doors, but it cannot perform miracles. Frustrated with the recessionary job market, Americans borrowed in record amounts to go back to school. Student loan debt jumped by over 50 percent in just five years, and now tops $1.3 trillion. Too much of this money went to programs students were unsuited for, or degrees with no career value. A more consumerist approach to education would better help people get their careers on track without wasting so much money.
6. Don’t let the market leave you behind. Bandwagon markets in stocks, housing, oil, and gold have led to spectacular busts. When getting rich quickly is the promise, it is amazing how many people become blind optimists. The rush into these markets is every bit as much of a panic as the scramble to get out when things go sour. People start out desperately afraid they will be left behind and end up desperately afraid they will be ruined. Perhaps by now they’ve been burned often enough to be hunting for investment bargains rather than the next bandwagon.

Pessimists are less fun at parties than optimists. They sweat the details, worry about what-ifs, build emergency savings, and never take their jobs for granted. In the wake of the banking crisis, poor financial market returns, and an extended stretch of high unemployment, that kind of pessimism might actually be healthy and lead to a sunnier future.