Denial, gambling-habit, media factors in financial crisis

Over the past 24 hours, the American people saw the largest bank collapse in U.S. history, worse than any experienced during the Great Depression. The failed bank, Washington Mutual, is the latest in a string of large financial entities that went belly-up. Americans are witnessing severe 'adjustments' in the markets with disbelief and incomprehension as to what really is going on. That is thanks to the dumbing-down efforts of the mainstream media, which is self-servingly (being stock-issuing corporations themselves) trying to steer peoples' emotions from panic to naive optimism.

But what are people to think when the largest companies in the world in the financial and insurance sectors have failed in such a short time?

The U.S. government is doing its best to assure bank depositors that their savings are safe yet few people hear the stories from the media of customers with more than $100,000 in IndyMac and other banks that have failed - those people saw their life savings disappear. Americans are now being told by many credible sources to not carry more than $100,000 in any bank account, but what will that do to balance sheets of bank institutions when large amounts of deposits are sucked out?


Last week, money-market mutual fund account holders nearly fell into the financial abyss when there was an unprecedented sell-off that was stemmed by a last-minute injection of billions of dollars of funds by the Federal Reserve and various Central Banks worldwide. The Fed announced that those money-market account holders now have a short-term FDIC-like insurance. Millions of Americans got lucky, yet long-term (permanent) money-market mutual fund insurance protection will be very costly to the economy.

Then comes the stockholders. Nowadays, most Americans are stockholders by virtue of having either an IRA, pension, 401k, mutual fund, etc... which carry 100% risk on its stockholdings from downturns in the stock market - there is no insurance for people who have their nest eggs tied up in stocks and mutual funds. Retirement accounts are insured only, by the FDIC, up to $250k, in case the bank that holds the IRA/401k fails; the inherent value of your retirement holdings is not protected from stock price fluctuations. If stocks plunge down to a DJIA level of 6,000, most people will lose about 50% of their life-savings.

What will, should people do?

Even though the 'rescue plan' being put together (or not) by U.S. politicians is ripe with pitfalls according to hundreds of leading economists, people are sticking with their stock-investments. Investors of all types simply won't cash out their portfolios in the same manner that gambling-addicts won't stop buying lottery tickets despite the fact that the odds of winning are poor. But are the odds really that bad? Americans, by and large, are still holding out hope, agreeing with the extremely optimistic view put forth by investment professionals on and off television and radio programs that you need to stay in it for the long haul because historically the markets have always trended upwards.

But what if the markets won't continue to perform the way they have done over the past 50 years and return profits and dividends to investors?

What if the signs of an economic Depression are staring us in the face, but everyone is in denial?

What if we are making the situation worse by denial, succumbing to distorted media information, and not dealing with our society-wide case of gambling addiction?

[Full chart, 'Reserve Bank Credit and Federal Reserve Holdings of U.S. Treasury Securities,' accessible at http://research.stlouisfed.org/publications/usfd/page16.pdf]