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.