The crisis in the people’s mind

Let me put things in the right perspective. What we experience today it is a crisis. And it’s on its way to become a monstrous one. But it is not an economic crisis. Not yet, at least. However, the wide range of economic measures taken by political (!!?) leaders certainly have the potential to transform the whole crisis into an economic one, an unprecedented one.
The stock markets are falling because people’s confidence is falling. No economic measure will help people’s perception about crisis. We know that people’s mood makes a lot of the movements in the financial markets. Behavioral finance is an established field in the academia. But my opinion is that no particular economic decision can change the mood of the people. Sometimes the most comprehensive measures will not help, but other times remote and insignificant measures will trigger market rebounds. In is true that high-level financial arrangements have become a mess that clogs the natural flows in the banking industry and these have to be sorted out. However, my feeling is that many of today’s measures are taken with the specific purpose of propping up the stock market, and this is ultimately wrong. I believe that the markets should fall down to the level where investors will confidently feel that it is time to move back in and then .. up you go.
The wide range of political decisions, however coordinated, will solve nothing in the stock market. They will only undermine people’s confidence in the resilience of the system and its ability for self-healing. This is something serious. This is a belief that will be left in the people’s minds for a long period and it’s difficult to assess its consequences for the years to come.
I would not go so far as to claim that we do not and we will not experience an economic downturn. It is here already and many people feel it directly. But that is OK. People have since long learned that the capitalist economy has a cyclical evolution. Upturns are followed by downturns. It’s part of the game. Moreover, it’s something that the free-market system needs, in order to flush away laggards in terms of productivity and the flawed business practices. Some may not realize this, but one of the virtues of the free market system, aside from prices emerging out of the dynamics of supply and demand, and perhaps more important that that, is the famous Schumpeterian rule of creative destruction.