Now, to finance. Finance is, in most essentially, the way that we distribute gains from trade across space and time. Money, by giving us a universal unit of account and medium of exchange permits us to make simple trades within large networks--it takes care of the tedious yet complicated business of swapping barter commodities around between myriad players until everyone has what they (think they) want. Money has somehow, mysteriously, become the world's most sophisticated swap-meeter.
Credit allows us to time-shift those trades. I give you something you want now in exchange for something I want later. These days, that thing I want later is almost always money.
In modern America, financial institutions stand between the players and most of these transactions.
But remember, we're now not only guessing about droughts and hurricanes and monster trucks; we're also guessing about the ever-shifting desires of all the people we trade with. If I lend you money to build widgets, I need to guess how great the demand for widgets will be, what other companies might try to beat you at your own game by making cheaper and better widgets, whether the government might decide it's in the public interest to outlaw widgets, whether you're likely to be the sort of fellow who runs his widget factory into the ground and runs off to Baja with his secretary, and so forth. I also have to make guesses about the future value of money. Will the government print to much of it? How much of the stuff I actually want will this money buy when I get it?
As you probably notice when you look at your TD Waterhouse statement, sometimes we get those guesses very wrong. When too many of us guess wrong at the same time, and it turns out that America doesn't actually need a Starbucks on every corner and seventeen varieties of social networking site, we get recessions. So add to the list of things you worry about the possibility that you, and everyone around you, have guessed wrong about your future desires.
If you have ever known someone who guessed drastically wrong about their desire to spend the rest of their life with their spouse, you know that when excessive optimisim crashes, it usually overshoots on the downside. And financial institutions, which are the collective repository of all of our guesses about the future, are often the locus of the economic equivalent of a nasty, nasty divorce. We are currently enduring the Alec Baldwin and Kim Basinger of economic corrections.
All this is very interesting, I hear you cry, but what does that mean for Citibank and Bank of America?
Well, when credit markets contract, the time horizon of our trading also shrinks. We start taking economic activity like Bill W. said--one day at a time. Credit markets are already contracting because people have realized that they are not nearly as good at predicting the future as they thought they were, and had therefore better neither a borrower nor a lender be.