Understanding the financial meltdown

The symptoms of the current financial meltdown are everywhere; what are harder to locate and explain in plain language are the root causes. That's why this column by Steven Pearlstein of the Washington Post struck me as being tremendously valuable in the straightforward and practical approach it takes to explaining the current financial mess. In a nutshell, America has been living the "I want it all and I want it now" binge-buying consumerist dream for the past decade, and now the party's over and the bills have come due. The folks with the biggest financial hangovers today are the ones who, when things began to slow down, "doubled down" on their debt rather than cutting back on spending -- and their ranks range from individual households to international financial giants.

This too shall pass, of course, but there are a couple of important lessons in here for those in the younger generation who are trying to understand what all this means.

One is that the financial markets, those avatars of pure and rational capitalism, rarely behave rationally. Rather, the markets run on a mob mentality that can veer from "irrational exuberance" to suicidal gloom in a matter of hours. And when they do, the only rational actor standing between them and self-immolation is (cue Darth Vader theme music) the federal government. Yes, sometimes government regulation is not just necessary, but essential.

Another equally important lesson is that everything in the economy is cyclical. There never has been and never will be such a thing as an economic expansion that goes on forever -- only a group of reckless people in every cycle who are willing to bet that this time it will. Make your own judgments and don't follow the crowd -- it's a good lesson for both economics and life.