The "Most Popular" story in today's New York Times sported this headline:
Can't Grasp Credit Crisis? Join the Club
It was okay as far as it went, though I do wonder how readers dealt with the trauma of learning (as the article explained) that "Ben Bernanke, the Federal Reserve chairman, won't be able to wave a magic wand and make everything better, no matter how many more times he cuts rates." Of course, this cutely satirical comment about the wand made me want to ask, If the Fed really is impotent then why does your print edition today feature a page one banner headline that shouts Fed Trims Rates Sharply??? Perhaps the only honest reply would be, "We're The New York Times, we get to have it both ways."
The closest the article got to explaining the psychology of the credit bubble was how "global investors, flush with cash...demanded good returns." Obviously that fails to identify the insanely speculative behavior of all the players at every level, and how they decoupled themselves from reality.
The decoupling began with their lack of experience and ignorance of history. What I mean is that the Great Depression of the 1930s was part of the living collective memories of two full generations of Americans. But that living memory is completely gone now. The lessons of that time are beyond the reach of a generation that doesn't read history, if it reads at all. So, everyone's risk valuation has been shaped entirely by economic prosperity and not at all by financial failure. The possibility of a system-wide crisis didn't fit any of the models. It's similar to the probability theory that skeptical scientists cited when they denied the existence of "rogue waves." Only recently did years of research and countless satellite photographs "scientifically" confirm what mariners had known for centuries -- that rogue waves are real indeed.
And when you mix the alchemy of securitization with people who are decoupled from history, the decoupling has a domino effect.
- Loan approval is decoupled from the ability to repay
- Lending is decoupled from deposits
- Bond ratings are decoupled from reality
- Investors are decoupled from their money.
The unhappy truth is that there's always more interest in cures than in prevention -- and the popularity of that NYT story shows how this truth applies both to the media and the public.
The good news is that, at least for individuals, it's not too late for important steps in prevention. In Conquer the Crash, Bob Prechter included an entire chapter about "How to Find a Safe Bank," and similarly preventive chapters. His information is more important today than it was when the book was a bestseller.