To an extent yes, but its not just market psychology.
I just posted estimates are this whole shakeout currently is estimated at about $200 BILLION in losses (and personally I think these estimates are low very low)... to put it in context, the S&L debacle was about $125 BILLION in losses.
So those that think this is some minor blip or is not going to have broad and lasting implications are misinformed or naive.
This is going to get much much uglier, before it gets better.
Losses to hedge funds, largely, though, no? I realize it is affecting corporate borrowing ability and even higher quality mortgage pools at the moment, but my guess is that this will be relatively short-lived.
To the extent that fundamentally good companies are still earning profits and making good products, this contagion represents an opportunity for long term investors. These companies will again have access to capital debt markets when investors realize the baby is now out with the bathwater. But, it may get uglier, first who knows...
Having been around for the 87 crash, the late 90s Asian contagion, the 2000 Nasdaq absurb bubble, the corporate malfeasance adventures of 2002, etc., I believe the market pendulum swings too far upward, then downward.
Maybe this time is different, but I’m guessing not. These CDO meltdowns and liquidity problems are an issue, but I don’t see it as a worldwide economic disaster like proclaimed on the front pages of some papers, and by traders and hedge fund managers who are now getting burned after convincing themselves that there truly is no longer any credit risk in the markets. That the markets have grown too sophisticated.
It reminds me exactly of the “new economy” and “New metrics” BS that was being spewed before the Nasdaq tanked.
Yes, there will be losses, but they are spread around the world instead of just to U.S. financial institutions. That is what the new derivative instruments are all about.
Don't forget about inflation. $125B in 1990 is more than $200B today.
Don't forget that our economy is massively larger than 1990, so the problem as a percent of GDP is much smaller.
The problem may get much bigger, but it is still a small problem.