Faith And The Financial Market

I've been reading House Of Cards lately, and it's the same story of over-leveraging. One would think that it's pretty obvious when a company's sunk into risky assets as collateral and has precious little stuff in its reserves. The funny thing here is that well...if everyone knows it already and they're still going for it, it seems to me that they're really just running on faith. And hot air.

If an economy is indeed heavily reliant on credit, it is obvious how a credit crunch can utterly devastate the economy. Yet it seems that leverage is the steroid of choice amongst financial institutions. It's hard to think of a better way to create a heck of a lot of stuff out of a small pool of assets. Arguably, it's the only crazy effective way available in your average capitalist economy.

Yet, humans will be humans. If faith were to be maintained regardless, runs on banks would not occur as often, and everyone can happily live in Oz with the magickal flying dollar bills. Obviously, this doesn't happen. Someone invariably loses heart out there and realizes that things are going south in one part of the economy, and starts figuring that liquidity is beginning to look like a good idea. Seeing a big player do that, others will start to take their cues and so on. The house of cards comes tumbling down.