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Every economic crisis in the past 50 years has occurred in the context of financial excesses: banks pushing the envelope of acceptable risks and credit standards; government policy vacillation and confusion -- cut taxes, raise taxes, lower interest rates, raise interest rates, more regulation, less regulation; stock market crashes and recoveries; and a voting public completely ignorant of financial issues and wholly incapable (even if given the right choices) of selecting political leaders able to stop the madness.

The present economic crisis has some unique characteristics, however. First, the last 25 years have been a period of vast financial innovation in world capital markets. It has been the era of complexity facilitated by computing technology and mathematical wizards believing they are “masters of the universe.” Securitization of car loans, credit cards and mortgages; derivative contracts such as options, swaps, futures; and combinations thereof, would not be possible without the computer. Valuing these securities after the fact (the secondary or resale market) is now performed by SWAG models otherwise know as Scientific Wild Ass Guesses.

Second, gross interbank financial transactions and contracts in the US alone total trillions of dollars. Innovative cash flow as well as “plain vanilla” structures link all the banks, making it difficult to be immune to balance sheet infections.

Third, the financial world has also become inextricably intertwined. Markets trade on a 24-hour basis and capital market securities are routinely held in portfolios around the globe. It is impossible to insulate one market from the global family.

Fourth, the US economy has become addicted to credit. Buying homes without sufficient financial resources, purchasing everything with credit cards and extending the average term of a car purchase loan to 71 months from the traditional 36 are three examples. Why purchase what you can afford, when you can get what you want?

The current crisis will dissipate in the short term. Its aftermath of slower economic growth (recession) will take longer. The real danger is complacency, which has followed every crisis and allowed the new ones to germinate. Each crisis has gotten more pronounced, because of the four factors cited. The underlying problem will continue to be government, with its inconsistent policy prescriptions and curative attempts. Moreover, with the Democrats ready to seize control of both branches, things won’t improve.