“A fundamental problem in the financial markets right now – a problem that’s often traced to the failure of Lehman Brothers last month – is the breakdown of trust. Because financial institutions don’t “trust” the solvency of other institutions and corporations, they aren’t willing to lend money. The end result is a frozen credit market. This is precisely what happened during the Great Depression. After Black Friday, the public lost confidence in the economy, and people began to hastily withdraw their money from banks. The result was a rash of bank failures, and an even larger push to withdraw cash. From 1929 to 1933, over nine thousand banks collapsed, leading to a loss of deposits worth over $6 billion. Because the normal bonds of economic trust were broken, a moderate recession became a devastating and deflationary depression.
But what triggers the breakdown of trust?”
(via The Frontal Cortex)
(Related: “Loss Aversion and the Stock Market”. And the follow-up to “The Giant Pool of Money”, “Another Frightening Show About the Economy” via This American Life. This excellent show goes into detail about exactly what happened to cause the mess we’re in. Thanks Stewart!)