Because it does not involve falling buildings and ranting fanatics, the "financial crisis" (looming depression) does not attract the same sort of attention as the terror attacks of 9-11 did. The wars in Iraq and Afghanistan, the quest for cash to pay for ambitious development and the rising price of oil all created a need for easy credit. Interest rates were lowered, flooding the world with cheap money made cheaper by inflated oil prices. The search for investments that would beat inflation tempted people to invest in dubious financial instruments, and to drive stocks up to 200% and 300% of earnings. Negligence or worse caused regulators to give triple A ratings to bonds that had no coverage except other paper. Now the whole mechanism is coming apart.

There are two dangerous delusions about the financial crisis. The first is that it affects only rich people. The second is that it can be solved by "letting markets take their course."

The ineptly named market in "securities" and "equities" is the basis of all of the economic life of the modern world. It is characterized by insecurity and inequity. The crisis is not limited to mortgages or real estate, and it is not limited to rich people. Left unchecked, it can stop the wheels of industry, throw you out of work and steal your savings and pension fund, just as happened in 1929. The people who will be most affected are the citizens of developing countries, who will find that they have no work and no money to buy food at any price. Once again, as in the dreadful decade following 1929, there will be countries with a large and unused industrial capacity and droves of angry and unemployed citizens, breeding grounds for totalitarian and militaristic ideologies. The oil-rich realms of the Middle East may find that they have no-one to buy their oil. The rest of the Middle East, Africa, and the underdeveloped south will find that there is no aid money to sustain their populations, which expanded beyond levels that could be supported naturally by land and industry.

Those who want to "let the markets take their course" have not considered what that course can be. The simplistic understanding of market economics is based essentially on a primitive barter economy. In such an economy, people trade food, land, tools, clothing, housing and labor - tangible goods that everyone needs. The value of each item is determined by relatively inelastic demand and by supply that is only affected by factors such as weather and improved technology. But that economy ceased to exist with the invention of money. Gold or copper or silver coins have little "intrinsic" value, other than possible use in jewelry or bullets or as electric conductors. A coin is worth a cow because people determine it is so. The market became even more tenuous with the invention of paper money and various "financial instruments." The value of these scraps of paper is based only on trust and on the value of other bits of paper. The real commodity that drives the modern economy is confidence, the supply of which is almost totally arbitrary and dependent only on mass psychology. When fear takes hold of the markets, the supply of confidence disappears. If the markets are "left to take their course" these bits of paper will be worth nothing. The oil moguls will find that they have sold their oil for bits of pretty colored paper, and will refuse to sell more oil for such paper. The industrialists will be unable to pay for oil or other raw materials with the paper they earn from selling their wares.

Fear has taken over the markets. Some of it is justified by the discovery of shady financial practices, over-generous lending and unrealistic growth forecasts. Some of it is fed deliberately by speculators who have bet that the price of various "equities" and commodities will go down. They tell us every day that there are trillions of dollars in outstanding mortgage debt that will inevitably lead to catastrophe and that therefore we should invest in whatever they are selling. Options trading is an exercise in self fulfilling prophecy. If people see that everyone else thinks a stock price will go down, they believe it will go down too, and lo and behold, down it goes! It's true that there are trillions in mortgages, and in stocks, but most of that money would be safe as long as the world economy allows the borrowers to repay their debt.

Government and financial leaders in the industrial countries seem to be mostly apathetic. Congress acted on a bailout plan with hesitancy, and only after it was too late. Everyone saw that the whole financial regulatory structure was shaky, but nobody stepped in to correct the problem in time. The United States has a lame duck president who was never attuned to the nuances of economics, and it is absorbed in its presidential elections. The Europeans are likewise reluctant to take concerted action that can restore confidence. Americans do not seem to comprehend that if the crisis spreads, there will be no money to pay for the defense of America so dear to McCain supporters, nor for the social programs beloved of Obama supporters. At this moment, focus on restoring confidence in the economy is the only thing that matters.

It may be too late. Many thought that passage of the US bailout plan would stabilize the markets. Indeed when the bailout failed in congress, the markets plunged. But after it passed, the markets plunged again. The cut in interest rates announced today may have the same effect. The best way to fix a problem caused by cheap money and careless lending might not be to encourage more cheap money and careless lending. The supply of fear is totally elastic, especially when short-sell speculators and options traders have an interest in increasing that supply. Confidence, on the other hand is a very perishable commodity. Both are self-propagating, creating that bane of stable systems, the positive feedback loop.

The mechanisms created to prevent a repeat of the 1929 crash are broken, and it is time to fix them, but nobody is doing much about it, except looking for places to fix the blame. It is easy to see the mote in the other fellow's eye. The New York Times commented:blockquote>

Speaking on Saturday of how to manage the financial storm, the French president, Nicolas Sarkozy, declared, “What is of the essence is that Europe should exist and respond with one voice.”

But over the past week as the crisis has radiated around the globe, some of the 27 nations that make up the European Union have broken ranks, opting in ugly disarray for self-interested policies to protect their own citizens and banks first.

At a time when the scale of events would seem to call for concerted action, critics say, the stock and credit market upheavals have elicited raw emotions and reflexive, unilateral actions. After a week of squabbling and rushed meetings, finance ministers agreed Tuesday to take a few modest steps to shore up markets. But they did little to dispel growing doubts that the European Union could grapple collectively with a common crisis.

“This is unprecedented,” said Simon Tilford, chief economist of the Center for European Reform, a research organization in London. “It has exposed the limits of European integration and coordination when presented with a crisis of this magnitude.”

Defenders of the European Union were quick to point out that its system, which lacks a central finance ministry comparable to the Treasury Department in the United States, was not designed for this kind of crisis.

And quietly, they point out that the Treasury Department did not prevent the United States from creating the mortgage mess; nor did Congress, speaking a single language on behalf of a single nation, have such an easy time finding consensus on a response.

Nobody is willing to do what is necessary. Rather than lowering rates and generating more easy credit, and rather than indiscriminately guaranteeing a lot of bad debt, it may be time to suspend the speculation, clamp down on the notorious "derivatives," correct the regulatory abuses and plug the holes, take over the bad debt and renegotiate it. It will cost money, but it may be a lot cheaper than the alternative.

Franklin Delano Roosevelt said, "We have nothing to fear but fear itself." But fear can cause a lot of damage. Creating fear is what terror is all about. The financial terror may be worse than the terror of 9-11, and fighting that terror must become top priority.

After so much dry commentary, a bit of poetry is in order, so I leave you with this song from another era.

For fear the hearts of men are failing,
For these are latter days we know
The Great Depression now is spreading,
God's word declared it would be so

I'm going where there's no depression,
To the lovely land that's free from care
I'll leave this world of toil and trouble,
My home's in Heaven, I'm going there

In that bright land, there'll be no hunger,
No orphan children crying for bread,
No weeping widows, toil or struggle,
No shrouds, no coffins, and no death

This dark hour of midnight nearing
And tribulation time will come
The storms will hurl in midnight fear
And sweep lost millions to their doom

(Carter family version)

Ami Isseroff