Crisis or Crisis of Confidence?

The economy is crumbling, the market is in the toilet and financial institutions are going under. Sounds like the perfect storm battering consumer confidence, doesn’t it?

The problem is most people are looking at economy as it is measured by the stock markets and the gasoline pumps.

While both are important and represent critical parts of our economy, neither is representative of the whole economy.

The stock market goes up and the stock market goes down. No matter how many times you repeat this truth, people are still shocked when it goes down, which is more indicative of the level of market education than just about anything else.

With gasoline prices hovering at $4 per gallon, you would think the end is near.

People in many parts of the developed world have live with this reality for years.

As long as the Fed maintains liquidity, the financial markets will not crater, although they have been battered and will take some hits before this is all over.

Our economy is still in the $14 trillion GDP range and that’s a big number. To put that in perspective, $200 billion is less than 1.5 percent of the annual GDP.

So, it this a real economic/market crisis or more of a crisis of confidence?

The answer is probably some of each. If you have just lost your house to foreclosure, it probably doesn’t get much worse financially.

But, most people haven’t lost their house and fewer will in the future as relief and reform works through the system.

As for those companies shuttered by the financial crisis, the free enterprise system gives you the opportunity to succeed, but implicit in that opportunity is the understanding companies can fail.

The government’s only obligation is to make sure that a failure in the financial system doesn’t precipitated a larger crisis.