Despite all the hyperbole, I think it’s fair to say that the credit crisis represents the most serious loss of trust in the finance system since the Great Depression (and maybe even a more serious loss of trust than that).
It is a true “credit” crisis in that the word “credit” comes from the Latin verb “to believe” (credere). Another related word is credible, for instance. And the root of this all is that the system of transparency and oversight failed in regards to mortage backed securities. A whole system of financial checks and balances that exists to enable investors to intelligently manage risk failed to apply here. The net is that when everything unravelled, no one knew (or knows) who to believe and thus who to trust. No one is lending because no one trusts anyone.
As we get further along in this, though, businesses are starting to hobble through and figure out who they can trust “good enough” to get done things that must get done. It’s standard risk assessment: faced with a choice between certain bankruptcy due to no business activity or a gamble that lending money might actually not lose you money, the finance machine is starting to come down on the latter side of the equation.
That’s not all that surprising. It means that life is going to go on in some ways here soon.
But, the bigger loss of confidence has yet to be really remarked on. And that is the loss of confidence by the average investor. Those of us who have done all the things we’ve been told all our lives we should do: save money, put it away, invest it, plan for retirement and then, and only then, do you get to do what you want to do. We have seen years of work evaporate over the course of a year and a half with no warning and no way of knowing it would happen. We followed the rules and lost for it, really.
Do people think that we will be returning to the status quo ante when things pick up again? Do people think we’ll rebuild the retirement savings machine now that we know that the system can take it all away with no warning and through no fault of our own?
I have my doubts. I know for myself I’ve decided to stop delaying gratification so much. I won’t blow all my money but I’m also not following an obsessive savings path trying to get to a magic number in the future either.
I tend to think that the finance system that comes out of this will be smaller. I also suspect that people will be working less obsessively. Maybe people will be working less and living more. Is that a bad thing? I remember the 1970’s as a time of horrible economics but also a time before the “your work is your life” movement of the 80’s reset the culture. If this is as big a time as the recession of the 70’s – 80’s was, then we should be starting to look for the social impact of this all.
1 Comment
12 March 2009 at 8:08 am
I believe (for the most part) that the “status quo ante” will stay pretty much the same. In the near term this dip will affect the boomers and Gen x, but will not affect Gen Y or later anymore than the economy hiccups in the 70’s affected Gen X.
That is barring huge socialist changes to our system; meaning the infrastructure of our financial system remains Capitalistic and (compared to their European brethren) untethered to Govt. (not existing topical oversight) control.
Why? People have a short memory; if your Ox isn’t the one directly gored; your average person is likely to get right back on the next uptick and ride it up, slapping themselves on the back all the way then bitching and whining when it comes back down. Even then, time heals wounds and fades memory, in another 10 years the market keeps climbing and you can bet a large number of Gen X will hop right back on.
Actually, come to think of it, Most people I know are still riding the market out…they are too scarred to buy up land most likely because they don’t want to liquidate their portfolios. Perhaps the question should be: Where else will / could people put their money?
Regarding work obsession: I believe that unless people perceive a new, ‘New Deal’ guarantee from the govt. on retirement, I think the general population will continue to be as work obsessive (if not more). I could be wrong, heck, I could be way off however, If I look at it as a lab experiment the results are the same:
The rat on the wheel keeps running, after time the wheel squeaks and it doesn’t move as freely as it used to, but the rat keeps running (even exerting more energy to turn the wheel than it used to) ’cause thats what it’s used to and will only stop when the wheel breaks.
One can also make a case that the work obsession of the 80’s was brought about by bad times of the 70’s (and early 80’s) .
All in all, I like your way of looking at it..it somehow remind me of a piece of art that hung in my parents Airstream when I was growing up: “Along the way, take time to smell the flowers”…