EDITORIAL & OPINION — Irrational exuberance gives way to gloom — Is this the bottom?

The morality plays of the Middle Ages used a stock cast of characters who personified the virtues and vices that tug the sleeves of the ordinary person. They generally ended with a cameo appearance by Death, whose walk-on served as a reminder to the audience that the closing act was always the same.

The plays served a social end, keeping a sub-literate populace aware that leading a good life had its benefits. It was an early way of getting across the important messages a society sometimes has to send — that crime doesn’t pay, that delaying gratification could provide for later needs, that virtue must sometimes be its own reward. The messages were cliches then, as they are now, but that didn’t lessen their utility, or their importance, or their vitality.

Modern capital markets are a sort of morality play, too. The ruling sentiments are, of course, Greed and Fear, frequently personified and often trailing damp clouds of chequebook-envy as they tread the boards. Greed unleashes the bulls and makes every investor a believer; Fear lets the bears from the cage and drives the punter to seek shelter away from the market.

Neither of them, in that world, is purely a virtue or purely a vice; they perhaps play better as a sort of yang-and-yin pairing, which could explain much about why Robert Friedland loves the market so.

And just as yang and yin struggle in the Taoist world-view, just as virtues and vices alternately gained the upper hand in a struggle for the soul of Everyman, the two forces wrestle daily in the world’s capital markets for the hearts and minds of the investors.

Greed had things much its own way through the late 1980s and most of the 1990s, and we saw a profoundly strong bull market during those years. A cartoon of the time put it nicely: a youthful trader told his equally youthful co-worker that some old guy downstairs had said stocks sometimes fall, too. The co-worker snorted back, “not in my experience,” and fixed his eyes back on the screen.

But there were warnings, as there always are. Even some normally sober observers started to mutter about how the bull market was “different this time,” how it might go on forever. Whenever market-watchers begin to talk about a new paradigm, you can be certain they’ll shortly be asking if you can spare a dime.

The central bankers kept their heads, as central bankers generally do; in 1996 Alan Greenspan, chairman of the U.S. Federal Reserve Bank, stepped backstage and dressed up Greed as “irrational exuberance,” warning that money would have to tighten or the economy might overheat. Everyman listened, briefly, then resumed his quest for double-figure returns.

Some observers watched as price-to-earnings ratios ballooned and shares in “growth companies” (the kind that had never seen earnings and only rarely cashed a cheque) went through the roof. They knew Fear would arrive sooner or later.

Fear’s entrance is usually dramatic. Stock values grown over a period of months, or years, are vaporized in hours or days. But he can be a consummate under-actor too, as he was in 1970 and 1976, slowly building until he dominates the scene. Reason sometimes plays a supporting role.

Fear seems to have taken over in many sectors, particularly in the resource industries. Greed is hanging on, ever more desperately, in the hot plays like software, but sooner or later Reason will point out that all the capital invested in the Next Big Thing will have to make some real money and not just capital gains; and then Fear will step in once again.

It may sound entertaining, but livelihoods are at stake. Keynesian economics were supposed to cure all this, but never did, not least because many governments preached it while practising something entirely different. And the large flows of capital around the world, the increasing use of derivative securities, and instant communication all serve to fuel the boom-and-bust cycle.

Resource industries and resource towns, and the people that work and live in them, know just what the business cycle can do. Sometimes there’s a cushion of accumulated cash, and sometimes there isn’t. And then, businesses sell assets, or people sell their houses.

The cycle ultimately comes around again, and the survivors taste the good times once more. Has Fear taken over? Not everywhere, and before Greed comes back on the scene, he must.