Crash Signals
As a non-economist comparing the current financial crisis with past crises, I think I can detect a pattern: first, an asset or assets are devalued, which in turn causes a "crisis in confidence", thus lowering the value of a broad range of assets.
What exactly is the value of "confidence"? Basically, it is the price an asset fetches at market; in other words, what we believe it to be worth, assuming we're more or less in line with potential buyers and sellers. If the public for whatever reason believes our assets to be worthless (that is lack confidence in our assets' value, or to "floccinaucinihilipilificate" them), and no one is willing to buy them, then the assets by definition have no market value.
From a layman's view, it would appear that in the late crisis, a devaluation of housing-backed securities led to a tightening of credit markets, ultimately dealing a blow to securities markets in general as leveraged assets went south. This actual damage--by itself significant--caused investors to change their buying habits, to be wary of buying anything at all. This was the crisis in confidence: out of the frying pan, into the fire.
The U.S. government (under two separate administrations) has worked to shore up confidence by buying up bad assets that it considered essential to preventing a more total collapse. It would appear it has succeeded, although we may never be certain of such a causal relationship. What is certain is that U.S. taxpayers will be paying the price for a long time, but to me it still seems prudent that the government took action rather than looking the other way. For all the hubbub about free markets and government being the problem, I'm glad the junior Bush made the right decision in the end. It's a shame he didn't get to make more of his decisions in that final period of his presidency.
