Is The Market Behaving Rationally?

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Here they come. Don Polovich/ Rapid City Journal/AP Photo/ hide caption

itoggle caption Don Polovich/ Rapid City Journal/AP Photo/

It's an old question, but one being asked a lot these days. How much of the collapse is just fear?

"Stop the insanity," wrote Glenn Schorr a UBS analyst. "It's all confidence, it's not reality"

And here where I live in Baltimore, the Fortune 500 company Constellation Energy's stock plummeted after what the rating agency Standard & Poor's called an "acute crisis of confidence." (Warren Buffett is now buying it.)

I asked Jeff Frankel at Harvard about all this yesterday. He said sometimes running makes a kind of perverse sense.

"If you're in a stampede, you look pretty foolish" standing still, he said. Plus, "you get killed.

"So it's not exactly irrational from the individual viewpoint."

I thought about this later. People talk about the wisdom of the markets.

Sometimes it's the wisdom of the herd.

Maybe we need one brave cow. Or cow herder, I guess.

Maybe that's the government.

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nice post...the current situation is a combination of a crisis of confidence and significant, real, structural weakness in infrastructure left without adult supervision for too long

Sent by Joe T, Annapolis | 8:15 AM | 9-19-2008

With more job losses a certainty -- maybe many more -- isn't the next shoe to drop going to be massive defaults on credit cards? Don't behemouths such as Bank of America and Citi own trillions in that debt? What then?

Sent by Phil Dirt | 8:48 AM | 9-19-2008

I don't feel that the fear is irrational - what my be more true is that we have not been frightened enough earlier.

Yes credit cards are next and yes the main issuers are exposed.

This can't be fixed.

For like the housing crisis, the assets that underpin consumer debt are losing more value than the historical norms and hence the "insurance" layer in credit card and auto packaged loans has been breached. All this paper - trillions is basically worthless.

It's not just financial - but also the old economy is dying at the same time.

Entire sectors such as the auto sector are also folding - not only putting people out of work but ending the idea in the US that you can be paid a high wage for manual work - so again huge strain on making payments - this is a structural shift not a blip.

Any business that depends on easy access to cheap credit and oil - which means much of the leaders today - has a business that is in trouble.

I would use any euphoria as a chance to get out.

The life boats look dangerous, cold and wet. The dining room with the band playing on the Titanic looks safe. There is only a mild list right now. But the ship is mortally struck.

Those who staid on board too long never made it

Sent by Robert Paterson | 10:29 AM | 9-19-2008

Is a brave cow herder a cowboy?

Sent by Sarah Goodyear | 11:16 AM | 9-19-2008

Until we have a woman running Treasury Dept.

Sent by David Kestenbaum/NPR | 12:10 PM | 9-19-2008

I think the balance sheets for these companines and many of the wealthiest are being hit with a correction. So much of the perceived wealth on paper is turning out to be worthless.

Like it or not, we have to let this happen. There has been a perception that wealth is limitless largely based on the ivnestment firms' ability to create more and more instruments. Well, it seems that there is not any real wealth supoorting these instruments.

It's as if several thousand people all bought 100% of the Brooklyn Bridge and just realized it. Now they want a bailout to cover they're stupid decision. Unfortunately, so many working-class families have interests tied up in the companies that made these decisions that they might actually suffer.

I say liquidate the decision makers to restore the funds of wage-earners and put rules in place that control the creation of financial instruments.

Sent by HL | 12:22 PM | 9-19-2008