The role of narrative in the rise and fall of the economy (update)

About five months ago, a couple of weeks after what now looks like the “market bottom,” I wrote a blog post titled, ” The recession may not be over, but the recession narrative seems to be recovering. In it, I wrote that one of the narrative shifts would be a focus on the role of “psychology” in the economy and less focus on rational-sounding reasons you hear from typical Monday-morning musings of economists.

In that post, I wrote the following:

The new narrative will suggest that more than “credit swaps,” the “crash” was caused by our leaders scaring the beejeezes out of us and we all responded like people who have the beejeezes scared out of them should rationally respond — we started hiding in the basement instead of shopping. As I blogged the other day, prepare to read a lot about Robert Shiller, who will be described as “one of the only economists who actually ‘called’ the current economic meltdown.”

Well, here we are, five months later and the stock market has risen over 30% since March.

And today, Professor Shiller has a long piece in the New York Times explaining how an echo-chamber of economists and the reporters (who write whatever the economists say) has turned the term “green-shoots” into a new economic feed-back loop narrative that has become a self-fulfilling prophecy.

So what does the future hold?

Unfortunately, Professor Shiller doesn’t tell us, as even he falls back on the clichéd crutch of all economists: “The other hand.”

He writes in the last two sentences:

“All of this suggests that a social epidemic is supporting renewed confidence. This confidence can keep growing by contagion, as a kind of self-fulfilling prophecy, and we may see the markets and the economy recover further. But in an economy that is still unstable, the stories could also morph into different forms, the price feedback could turn downward and the dynamic could turn ugly again — just as it has in the past.

Translation: “On one hand, the economy can grow, on the other hand, it could turn downward.”

Heck, I get better insight than that from Chauncey Gardener.