Thursday, August 16, 2007

Confidence and the Credit Crunch

Everyone is saying that investors have lost confidence, but what does that mean? Confidence does not just hang in the air. Having confidence is a transitive verb. You must have confidence in something. I presume that investors had confidence in what bankers were advising them about the quality and price of various assets. I presume that they had confidence in what the brokers and credit rating agencies were saying about the value of CDOs and other financial products. I presume that homeowners had confidence in the real estate agents who told them their houses were worth twice as much as they were a few years ago. I presume that people had confidence in the people that said that the markets will keep going up.

What has changed is that investors have found out that their confidence was misplaced. The assets they were lending money to buyers, were not worth as much as they were lead to believe. That is not lack of confidence. It is finding out that your confidence was misplaced, which is quite a different animal.

I am not that interested in what will work. I more interested in what is right or wrong, or just plain foolish. So far it seems that the bankers and brokers and credit raters whose valuations and assessments have proved to be wrong were unwise, or just plain foolish. Being foolish is not a sin. Trusting a fool is unwise, but it is not a sin. However, I suspect as time goes on that we will find that there has been some lying too.

Confidence has not disappeared into the ether. Rather, investors are looking for assets and institutions that inspire confidence. These are rarer than was previously thought, but at least we are getting closer to the truth and that must be good.

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