[quote=underdose]”The first thing to realize is that the single biggest issue in the financial system is confidence in the system itself. I think we can all agree on that. ”
Actually, no, we can’t all agree on that.
I think one of the biggest issues is that for too long we’ve had too much confidence in confidence. People we’re confident as hell that housing prices would go up forever. When people are confident in a fallacy, they can push markets into an imbalance, but only for so long. Ultimately, regardless of people’s perceptions, fundamentals win.
Which leads to the bigger issue, that the fundamentals are terrible, and have been for years. Any bailout plan might bouy people’s confidence temporarily, but the horrid fundamentals will win. And since bailouts actually serve to worsen the fundamentals, IMO confidence and perceptions be damned.[/quote]
Having “too much confidence in confidence” is what I’d call “misplaced confidence,” which is very different from generic confidence. 75% of all of the FDIC-insured lending institutions will survive without incident even if we have a deep, long recession in this country. These institutions deserve your confidence. Once folks no longer have confidence in prudent, healthy institutions, the system goes down. (I think we’ve all seen “A Wonderful Life”.) Confidence in these institutions is necessary. Now, perhaps you’d like a system with no fractional reserve lending. OK. So long as you don’t have a problem with 20% interest rates, that’ll serve you well.
