When Elisabeth Kübler-Ross penned her 1973 book On Death and Dying — which identifies the five stages of grief as denial, anger, bargaining, depression and acceptance — she was concerned about cancer patients and their loved ones, not the psychology of shock-weary investors who have watched a financial meltdown infect world economies and bleed billions from their savings and portfolios.
But grief, it turns out, follows much the same curve regardless of what has been lost. From the onset of the subprime credit crisis in mid-2007 until the autumn of 2008 when the teetering house of financial cards finally collapsed, most investors were in denial. Experts now say they knew all along that the system was overleveraged and something about mortgage-backed securities smelled bad. But they originally told themselves that the global economy remained fundamentally sound and that a recession, should it even come to that, would probably be shallow and short. They expected markets to react accordingly.
That period of wishful thinking was followed by anger. It was directed at everyone from former Fed chief Alan Greenspan for keeping rates too low for too long, to Wall Street CEOs for tossing out false assurances, to short-sellers for betting that things would get worse. “People were seeing things they’ve never seen before, and they were trying to figure out the world, but they couldn’t,” says Meir Statman, who teaches finance at Santa Clara University in California.
Bargaining came in the form of bailouts and the belief that the government’s cash injections, infrastructure spending and 0 percent rates might actually right the ship. This desperate clinging to hope for a quick turnaround led to a nausea-inducing rollercoaster ride in the stock markets in the last quarter of 2008 and sent the Chicago Board Options Exchange’s volatility index, known as the VIX or “fear gauge,” which usually hovers in the teens and 20s, to well above 80.
But haggling is exhausting, and was soon replaced by depression. Applied to the current crisis it looks a lot like a bad case of buyer’s remorse — people are realizing the full extent of the federal government’s financial obligations, and they’re feeling a bit sick about it.
Some people are stuck in depression, but Statman says most have moved on to acceptance. “People see that the money is gone and that it’s time to let go. They realize they are in this new world now, they’ve sustained this loss, and they’re saying, ‘I can’t let it dominate my life anymore, I have to find practical solutions.’”
As if on cue, the VIX index, which measures the cost of using options to insure against big drops in the Standard and Poor’s 500 index, dipped below 40 in early January. “There is a sense we’ve moved away from panic and into calm,” says Statman. “The fundamentals aren’t better but I think there’s a feeling that all the shoes dropped, which really says that sometimes, just not having bad news is good news.”
