Is it correct to assume that the credit crisis is mostly psychological?

BY busadmin  October 29, 2008 at 9:46 AM EST

People watch market numbers; AP photo

Question/Comment: Is it correct to assume that the credit crisis is mostly psychological? Banks hold bad paper which needs to be exposed and somehow that debt needs to be paid or securitized again, so that banks regain confidence in other banks’ health. Aren’t both solutions, either giving to banks or consumers, merely pouring water over cracks? Why not just allow the banks to fail, or be bought by foreign SWFs, but take Federal money and give it to consumers to weather the shock? If consumers save, isn’t that the same as the Federal Reserve spending money, except, that consumers would shore up local banks directly, not the big banks.

Paul Solman: A tangle of questions here. And from Korea, no less. How shocked are people THERE?

To your main point, yes, most emphatically YES: the credit crisis is mostly psychological, in my view. As I’ve written here, and said on the NewsHour numerous times over the decades, “credit” comes from the Latin “credere” – to believe – whence come words “credibility,” “credence,” etc.

In every material sense of the word, you’d think I was at least as WEALTHY today as I was a month or year ago. You too, most likely. But the faith in what we used to own in our pension plans – our stocks, even some bonds – has evaporated and so, as a consequence, has their “value.” Same for our houses. (All this assumes you have a positive net worth, of course.)

See my longer disquisition on this matter: ‘Is It the End of the World as We Know It?’