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In addition to the technical factors which have brought on the financial crisis - the huge speculative bubble and leverage, derivatives, fractional reserve banking, spending beyond our means, etc. - there is another major factor.
As market psychologists Richard L. Peterson M.D. and Frank Murtha, Ph.D. wrote in October:
"This crisis is now fundamentally about psychology.Understandably, the Fed's refusal to disclose who it gave $2 trillion in loans to, and Paulson's failure to disclose what Treasury is doing (even to the official Congressional TARP oversight committee) are adding to investor and taxpayer distrust. Obviously, they need to start disclosing what they're doing.Trust is the oil in the engine of capitalism, without it, the engine seizes up.
Confidence is like the gasoline, without it the machine won't move.
Trust is gone: there is no longer trust between counterparties in the financial system. Furthermore, confidence is at a low. Investors have lost their confidence in the ability of shares to provide decent returns (since they haven't).
This is now a PSYCHOLOGICAL problem."
And the big financial institutions don't trust each other, because they know that all of the other companies might have hidden their problems or gamed their books. See this, this and this.
Bigger Context
But these facts cannot be taken in a vacuum.
Remember, every time Paulson, Bernanke or Bush open their mouths, the stock market dives (see this and this).
Why?
Well, what if - on your way to the bank - you happen to see your normal banker mug an old lady and steal her purse? Would you then proceed to the bank as if nothing had happened, and give your money to that banker?
Probably not.
Similarly, Americans' trust in our leaders and our systems have collapsed. Whether or not Americans think much about it, we all know that Bush lied us into war in Iraq with false claims about WMDs. We know that the Bush administration has implemented a widespread torture policy, and lied about it. We know that our government has been spying on us for years, but lied about it. We know that our intelligence and military should have stopped the 9/11 attacks, that the official story about 9/11 is very shaky, and that something must have been very wrong to allow them to succeed.
So How Do We Restore Trust?
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