The Trust Crunch

Jim Surowiecki has written an excellent piece that should be read by everyone. I remember Jim from way back, when he was known as “MF Rogue” — his screen name at the Motley Fool (when Motley Fool’s content could only be read on America Online during the mid-1990s). He sure has come a long way. And, geez, I am getting old! Anyhow, I digress. Jim’s analysis of the current credit crunch is spot on. And you should read it.From his piece in the New Yorker: The Trust Crunch (link here)A few years ago, banks and other lenders seemed indifferent to risk, as they doled out loans to people with dubious incomes and poor credit records. Today, they are positively paranoid, distrusting even the best borrowers and forcing companies to pay far more interest on money borrowed.And this:The fear that has overpowered lenders is not just about the current market chaos. It also reflects their lack of faith in the models and systems that they rely on to evaluate risk. For Morgan, that process of evaluation was all about relationships. In the modern financial system, by contrast, risk evaluation involves two things: impersonality and outsourcing. Personal judgments about the reliability of a borrower—the sort of judgment that Morgan, or a small-town banker, would make before issuing a loan—have been replaced by mathematical models.Read the rest of the story for the conclusion.