This same theory should hold true in individual households. You, of course, know it by a different name - consumer confidence. If people feel reasonably certain that their country is not going to go to war, that they will probably have a job now and in the future, and that the economic system is still functioning so that those who save, invest, and pay down their debts will prosper, they will buy houses, start businesses, send their kids to college, pick out a new wardrobe, take piano lessons, go out to dinner, and everything else that makes our global markets function.
What's happened in the past year and a half is that the economic security felt by most people has been decimated. At the same time unemployment rose, something unprecedented happened - all asset classes collapsed across the board, including real estate, equities (stocks), bonds, and commodities. Consumers lowered spending at the same time financial institutions, reeling from their own decimation, cut off lines of credit and stopped making new loans.
What can you take from all of this? The lessons to economists might be that they should spend some time speaking to the psychology department. Many of our decisions are not purely rational - we are biological creatures with individual passions, desires, urges, and preferences. This shows up in financial statements. (You can tell a lot about a person by checking their checkbook register for a year.)
In your own life, the goal should be to insulate you and your family from the fears and potential troubles that could hit your neighbors and country. I've been convinced for most of my life that the biggest risk a person can take is to generate more than 50% of their income from a single source or job. Even when I was a teenager, I had multiple cash generators so that one of them going down wouldn't hurt my purchasing or investing patterns. In engineering, this concept is called redundancy. You should put in place backup systems to backup systems.
This recession has proven to be a great opportunity to expand businesses and pick up assets "on the cheap" as the saying used to go. Take a look at the Forbes list - some of the people on there were regular folks who were laid off or fired and then went out on their own. Opportunity sometimes presents itself during the most inconvenient times. You aren't going to see a beacon in the sky saying, "This is your chance. Take it." That's not how success works.
