People Keep Spending. Has Anything Changed?

BY busadmin  December 18, 2008 at 5:58 PM EST

Worried Wall Street broker; AP photo

Question/Comment: I have been amazed by how we’ve been told of a crisis since 9/11. It was going to ruin the U.S. economy, then it was Afghanistan, Iraq, Katrina, the Midwest floods, the fires, the hurricanes, oil prices, the DOW, mortgages, and yet we got through it. People kept spending and spending. What has really changed? Is the real reason behind this economic crisis just that people have run out of money and credit to buy?

Paul Solman: Yes. Or more accurately, that people now THINK they’ve run out. Or as economist Herb Stein, advisor to Nixon and father of Ben put it in what’s known as “Stein’s Law”: “ If something cannot go on forever, it will stop.”

In theory, people COULD have kept spending, so long as other people would lend them the money, believe the promises that they’d be paid back. Even that multi-billion dollar hedge fund scam artist, Bernard Madoff, could conceivably have kept his game going forever, as long as more and more people kept believing in him. Or the old investors kept coming back for more.

Credere, the Latin for “belief.” Credit. Credibility. Who knows WHY it turns, WHEN it turns? But when it DOES, all bets are off. And then those crises of the past no longer seem benign, but as key contributors to the gathering storm.

Editor’s Note: For a refresher on the future of the credit crunch, watch a previous Paul Solman segment in which he interviews theorists Nassim Nicholas Taleb and Benoit Mandelbrot.