While many economic indicators are tied to applications at the unemployment office or home foreclosures, the issue of consumer confidence is more emotionally driven. Many factors weigh on each individual consumer, yet the nation's overall mood swings have a direct impact on many businesses.

George Loewenstein is a professor of economics and psychology at Carnegie Mellon University known for his research on factors that affect economic decision making. He is the author of numerous articles exploring the role of emotions in economic behavior, which is what we asked him about as it relates to nation's current situation.

Q. In October, researchers announced consumer confidence levels had fallen to all-time low levels, although they moderated a bit the next month. To what extent do you think people are reacting emotionally to bad news all around?

A. Because I study the role of emotions in economics, a lot of people have been asking me questions about whether the current downturn is driven by irrational negative emotions, such as fear and anxiety, with the implicit assumption that if we could only calm these emotions, things might return to normal.

It's possible that those emotions do play some role, especially in the collapse of credit markets, but it isn't obvious to me that the anxiety and pessimism are unfounded. People have good reason to be fearful.

Every investor who doesn't have his or her head in the sand is struggling with the question of whether the economy and stock markets have bottomed out or have a lot further to fall. Unfortunately, no one knows the answer, which creates a lot of uncertainty and a lot understandable misery as a result of not knowing how one should behave.

Q. OK, so we're probably right to feel worried now. Did emotionally driven decisions, even before the government started bailing out large businesses, get us into this mess?

A. If emotions play a major role in the current situation, I would say it has been more in the lead-in to the crisis than in people's reactions to what's happening now.

In 1996, Alan Greenspan lamented investors' "irrational exuberance"; but when the dot.com bubble burst a few years later, investors didn't seem to learn the lesson that what goes up (way above historical levels) must come down.

After the stock market went bust, Americans (and others) poured money back into stocks and into housing, and people spent their way into debt in a fashion that could only make sense if they thought the good times were going to keep rolling forever.

Q. That certainly didn't turn out to be the case. Now what is our mix of fear and newfound financial responsibility telling us to do?

A. Amazingly, people are starting to save money now, when things are tight, when they should have been saving when times were good. The same is true of our government.

The Bush tax cuts were criminal, coming at a time when they weren't needed. Now, when tax cuts and government spending increases are needed, we already have a huge deficit as a result of cutting taxes when we were in the midst of prosperity. As a country, we have gone through a long period of irrational exuberance, and now we are paying the price.

Q. We're feeling stressed out, broke and maybe even guilty. Will we at least be smarter as a result of living through this?

A. A few weeks ago a reporter asked me if there isn't a silver lining to the current situation -- if it isn't possible that people are becoming less consumerist and are learning to enjoy things that don't cost money. I do think that such a shift in values and preferences would be a good thing for the planet in the long-term.

But in the short term, I just see a lot of pain, from people losing their jobs or being worried that they will, losing their nest-eggs, blaming themselves for bad investment decisions, having to make hard decisions about things that should be taken for granted, like health care and higher education.

Q. Let's say the incoming administration organizes a gathering in January to discuss how to bolster consumer confidence and make Americans feel more confident about investing, buying, taking new jobs and so on. You are invited.

What message would you contribute to the discussion? Is there some step or steps that should be taken, in your opinion, that would make a difference?

A. If I had the ear of the incoming administration, I would tell them that they are planning to do exactly what I think they need to do, which is to massively increase government spending in ways that will stimulate the economy in the short-term and also contribute to long-term prosperity -- things like spending on energy conservation and alternative sources of energy, fixing the broken health care system, fixing our broken infrastructure, and (although, as an educator, I may be biased on this one) investing in education.

If people are employed and feel that the country is moving in the right direction, they will start spending, and the economy will get back into gear.