By Maya Baltazar Herrera

It?s a week after Valentine and my inbox is full of financial bad news as end-of-year numbers begin to come in. Last year?s profits are dismal, export growth is depressing and companies are trimming their workforce. Some of my favorite Western retailers are in danger of bankruptcy. All over the world, economic growth forecasts are being trimmed. By now, it should be clear that, not only is this crisis global in its footprint, in most countries, it will probably rank as one of the top three worst financial crises in a century. In the United States, this crisis is already being touted as rivaling the great depression.

So this is not a hiccup. Business as usual is not an appropriate response. And, perhaps, most importantly, certain behaviors need to change. Of course, not everyone admits this. For example, perhaps the single funniest headline in my incoming mail this week is one warning Americans that this lower standard of living might be permanent.

Consequences

Being essentially a technician, I like to put things in nice boxes. When I am asked to make predictions about the future, I will normally begin with my assumptions about causes and effects and link back to data.

Let?s take standard of living as an example. It?s no secret that the American standard of living prior to this crisis was being paid for by debt. It?s no secret that part of the reason Americans were comfortable taking out debt was that home prices as well as equity prices had been on an upward swing for a very long time. In fact, it was everyone?s general opinion, even before the crisis, that the level of American household debt was insupportable over the long term.

Now, that final, little tidbit of information was not something only economists or finance analysts was privy to. This was the stuff of mass media. Household debt had increased to such alarming rates that virtually all of the talk show hosts had done at least one entire show on managing your debt. Not only articles but entire books on managing debt, especially credit card debt, were popping out of the woodwork.

The old standard of living, what I tend to think of as over-consumption, was really being fueled by debt. The rational human response of fear concerning debt was overshadowed not only by the ever-rising asset prices but also by the fact that not only were many, many people doing the exact same thing?borrowing and over-consuming?but also that seemingly stable financial institutions seemed comfortable lending the money. The theory was that, if there was truly a large risk, a good bank wouldn?t lend you the money, now would they?

Let?s not even get into what banks thought they were doing and what all of those people who were flipping real estate and playing with huge stakes and high risks in the markets were thinking.

Let?s just all agree that the old standard of living was dependent on debt that, even with pre-crisis conditions, was unsustainable. It seems clear then that it was only going to be a matter of time before Americans needed to face up to reality and adjusted their standard of living.

Let?s go one step further and agree that that time has come. How then can any rational individual even begin to believe that there is a way to continue spending at the old level?which, really, is what that phrase standard of living really means!

Hope

If I were an economist, I could now engage in a discussion concerning how any stimulus package that focuses on attempting to bring the level of individual spending back to pre-crisis levels is fatally flawed. I could also explain how any mechanism designed to prop up companies?even entire industries?without forcing them to change in ways that will make them truly competitive over the long term is doomed to fail.

But my background is in actuarial science and in human behavior, so my natural focus is on the micro rather than the macro. What truly interests me is what goes on inside individual minds.

What is it that makes individuals borrow what amounts to years of their annual income simply to honeymoon on some Pacific island? What is it that makes individuals spend months of income on shoes? What is it that makes people buy houses so large they have rooms they never use? And, even more importantly, after the rug is pulled out from under them, what is it that makes them continue to believe they can go back to their old ways?

Of course, I should remember that early in this crisis, usually intelligent analysts?the same ones who wrote about globalization?were actually musing about decoupling. I should even remember that the US and the local markets hit their century peaks in the last quarter of 2007, after news of the unwinding credit crisis had been released.

What I think might explain this seeming widespread refusal to deal with reality is the very same thing that leads people to enter into second marriages. It is, in the eternal words of one of my very best friends, the triumph of hope over experience.

Now, while I can?t argue about using your heart instead of your head in what is the quintessential purview of the heart, I must strenuously object against using the same decision-making methodology when it comes to financial decisions.

Now that Valentine?s Day is over, let?s get back to work, shall we?

Readers can e-mail Maya at integrations_manila@yahoo.com. Or visit her site at http://www.mayaherrera.com.