Before I discovered your blog — before you started blogging here — I come across two of the memes in that posting independently:

* J Diamond’s Collapse in the context of peak oil and climate change.

* Falling middle-class wages in the work of Professor Elizabeth Warren.

… but didn’t think to put them together until recently when people were arguing that oil production could increase indefinitely because rising prices would lead to rising investments in production. It didn’t make sense to me as to how people would cope with paying this higher price. Paying via credit only made sense if the future brought more efficient technology — one of the few reasons people cited as justification for foreigners’ willingness to buy American debt.

And this reveals a key reason why people were so willing to go with the flow. People had bought into the dream of forever accelerating technological improvements. They looked at their collection of tech toys, with their accelerating CPUs, their ever expanding MP3 player capacities, their shrinking cellphones, and somehow convinced themselves nothing could go wrong with ceaselessly expanding credit, because some advanced technology would come in from left field and save the day. And it was always getting cheaper. There’s even a religion that has sprung up around this, called Singularity.

The trouble was this rapid technological progress in electronic gadgetry didn’t easily translate to rapid technological progress in other fields (energy, healthcare, etc). When the dot coms went bust, many pundits were already predicting the next bubble would be in biotech or nanotech. It’s the availability bias at work. Citizens judge technological progress based on what is immediately available (the iPod and cellphone in their hand) and not on what is distant (e.g. deep water drilling, medical equipment, water purification). The credit bubble surpassed any reasonable expectation of what technology could one day deliver. It was only a matter of time before reality would bite, and it is now biting down hard.

you make some pretty astute comments. Ultimately, you’re right about feeling it in your gut.

I have a question for you: Do you think people were being misled about the true nature of things because they were seduced by rising house prices or rising stock prices?

read the post A populist interpretation of the latest boom-bust cycle and tell me if it fits with what you are saying.

You say that a lot of people lacked the data, skill and know how. I would agree, but your last comments about Groupthink and the bystander effect are very compelling as to why this thing carried on for so long. We are a social animal, humans. It’s difficult to go a different route when everyone is headed down the same path.

Those French have a point about not wanting to see.

It’s the same attitude to everything. People don’t care how their car works until it breaks down in the middle of nowhere. They don’t care how to learn how to change a fuse until one blows. People never paid any attention to climate science until it started getting hot, now politicians and science fiction writers fancy themselves experts in climate science.

Anyone could have seen this whole thing coming. What am I missing?

Not everyone. It is true that many people sensed something was wrong about the world economy but lacked the data, skill and know how. I’d count myself as one of them. However the most I could say was this thing was unsustainable but couldn’t quite explain why.

A lot of this has to do with psychology: Groupthink, the bystander effect, bowing to authority, the “if it ain’t broke” attitude.

you know what I don’t get is how little people cared about economics and finance until the whole house of cards came down.

Anyone could have seen this whole thing coming. What am I missing?

But the main current problem is not CDOs anymore, the reason why government is intervening so much is that they know that if a single big bank fails, the CDSs dominos will roll and the whole financial system is going to collapse. This is no joke, the financial system is insolvent and on the edge of a global collapse.

Irrational exuberance
+ greed
+ incompetence
+ thirst from power from policy makers and government agencies
+ lack of education/knowledge
= this Mess.