Subprime Psychology

The market often behaves as if it is one collective netity. Nobody would guess that it is the result of collective action on the basis of individuals in the sense that globalization makes everything appear to be unified. However, the way that markets behave are similar to the way that viruses spread. There are contagious effects of certain individual actions.

It is usually the little things that count in big market fluctuations. As you are trying to get out of debt, or remain out of debt, you should be aware of what might rock the subprime house of cards.

Since at least the market rally that started in early 2003, optimistic Pollyanna has ruled the markets, and greed has run rampant. As the markets wait for Fed chairman Ben Bernanke to put on his best Donna Reed mask to bail out the subprime lenders with the Bailey family's honeymoon money, Cassandra and her fear are ruling the day.

A lot of wags have noticed that for the US stock market, bad news is frequently treated as good news. Unemployment is up, or industrial production is down, and stocks rally (due to attendant possibility seen in these reports of upcoming Fed interest-rate cuts). However, when major financial institutions have what are delicately called "liquidity issues" (ie, their loans aren't being paid back - they have no income), that is always bad news. What if the bank defaults, declares bankruptcy? Other banks that it had borrowed money from now won't be getting paid back, they'll lose whatever income stream they were receiving from the first bank. The same with that bank's creditors, and then other banks and so on.

This kind of cascading financial catastrophe is often called a "contagion", and with good reason. Like a virus, it can spread and bankrupt the entire financial system. It almost did in 1998, during the LTCM hedge-fund crisis; in 1929,in an era when the worldwide financial system was far less globalized and integrated than it is today, after the Great Crash it actually did, and so initiated the Great Depression of the 1930s.

Enjoy the whole article. It is insightful and will make you aware of a volatile world that does not exist in the mainstream media.

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