The proximate cause of our problems today is the breaking of the US housing bubble, and the ultimate cause is the remarkably widespread belief in rational expectations: that economic man behaves like a logical machine that in turn causes markets to tend to efficiency and equilibrium. In such a world the tech bubble was rationalised by Alan Greenspan as an internet-driven productivity burst, and the housing bubble (in reality a 100-year event) was so preposterous an idea that Ben Bernanke could not see it, such was his faith in efficiency.
In an efficient world all asset price changes merely reflect fundamental change and thousands of well informed investors are bound to be right. There is never anything to fear and we can all keep dancing forever.
