Released: October 10, 2008

Investors, bankers have lost confidence

Source: David J. Lynch, USA Today

With its alphabet soup of CDO and CDS and TAF and TARP, the current financial crisis can seem hopelessly complex. But it really boils down to one word: confidence. The global financial system is grinding its gears because, from big banks to small investors, the essential confidence required to buy, sell or invest has disappeared.

Except for cash-and-carry deals, every capitalist transaction requires a certain amount of faith: faith that an asset to be purchased has some genuine value, faith that a party borrowing money will survive to repay it. Right now, that basic element of trust is gone, and until it comes back, financial markets will remain skittish and economies around the world will suffer.

“You have a crisis of confidence because people don’t believe the bankers, and the bankers don’t believe each other,” says David Smick, author of The World Is Curved: Hidden Dangers to the Global Economy.

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