Econowatch

Ben Bernanke, the chairman of the U.S. Federal Reserve, and the man charged with resuscitating the world’s largest economy, thinks we all need to be smarter about our finances. “As the global economy continues to experience extraordinary turbulence . . . the need has never been greater for initiatives that help consumers learn to manage their money wisely,” he told a conference on financial literacy this week. Big Ben should be careful what he wishes for.

In recent weeks, world stock markets have been buoyed by a rebound in confidence, and that confidence appears to be based on . . . well . . . not much, really. Earnings among America’s big banks have been better than expected, but jobs are still being vaporized at an alarming pace, housing prices continue to drift lower and blue-collar industries remain dead zones of fear and misery.

Even the earnings success on Wall Street ought to be taken with a grain of salt. Goldman Sachs wowed analysts with a US$1.8-billion profit in the first quarter—pretty impressive for a brokerage thought to be in need of rescue a few months ago. But on closer examination, that profit was largely due to an accounting quirk. Goldman changed its fiscal year and its “profit” didn’t include results for the month of December. In that orphan month, the firm lost US$1.3 billion before taxes. Are investors concerned? Nope. Goldman’s stock has almost doubled this year.

That’s the thing about irrationality: it can cut both ways. NPD Group issued its latest consumer sentiment survey last week and found that most Americans remain convinced the economy is in the toilet, but their spending plans are edging back up. As NPD said, consumers appear to have “reached their cost-cutting limit.” In other words, we’re getting frugality fatigue—and thank goodness.

We might’ve saved ourselves a lot of pain if we were all more financially literate a few years ago, but now isn’t such a hot time to be fixing that problem. Sometimes the economy relies upon temporary suspension of financial prudence. It requires leaps of faith. If all consumers wait for definitive signs of recovery before venturing out to make major purchases, then the economy will never recover. Fear becomes self-fulfilling, and prudence self-defeating. So here’s to better financial literacy and an end to reckless spending. Just please save it until the recovery is underway.

GRAPH OF THE WEEK: The four big bears

The four biggest bear markets of the past hundred years proceeded along very different trajectories in terms of length and depth. Below, a chart of the four bears in months from their market peak to trough. The big question on the minds of economists: is this bear market going to be more like the 1973 oil crisis, or more like the 1929 crash that led into the Great Depression?