Could the Meltdown be a Hoax?

I'm wondering whether the meltdown might be more a product of fear than of reality.

Obviously, sub-prime loans are really defaulting. And there were a lot of packaged securities that used those loans. However, it appears to me that a great deal of the meltdown has to do with stuff that nobody seems able to explain or measure.

There are all these bad securities out there, supposedly screwing up the finances of banks, but nobody knows where all of them are or how much they're worth. Doesn't it seem odd to you that in a world where we're practically drowning in numbers, nobody seems to be able to get their hands around the exact size of the problem?

And, speaking of numbers, a couple of days ago I heard some analyst talking about $100 trillion at risk. I don't care how screwed up the mortgage market is, there's a "common sense" part of my brain that says: that's ludicrous.

I smell a rat. And it's a rat that's emitting the sour stink of deja vu.

One of the economists who's being widely quoted on the meltdown is Ed Yardeni. Turns out that Yardeni was a key proponent of the theory that impending Y2K disasters would mean the end of the world as we know it.

Now, there was some truth behind the Y2K situation, in the sense that there were some very old computer programs that couldn't handle the date change.

But the notion that these would cause widespread disasters was ridiculous. It depended upon two faulty premises: that errors could "cascade" from system to system like viruses (not true) and that embedded circuits used calendar dates rather than elapsed time (also not true).

The real proof that the Y2K threat was massively overblown was the fact that no disasters, major or minor, happened on Y2K.

Proponents of Y2K claim that the reason for the lack of failures was that all the bugs got fixed. But that's ridiculous, because computer programs are ALWAYS full of bugs, and program patches are more likely to be buggy than programs written from scratch.

If the Y2K problem were as enormous as the true-believers said, then the "fixing all the bugs" was the equivalent of rolling snake eyes 1000 times in a row.

Now, during the heyday of the Y2K mania, experts like Yardeni were absolutely convinced that the Y2K bugs (which did exist, but were minor) would have an economic impact as high as trillions of dollars.

Sound familiar?

And even though Y2K came and went without directly impacting the economy, the belief that there would be Y2K disasters, most definitely had a major economic impact.

Yardeni and all the other Y2K doom-and-gloomers convinced hundreds of thousands of Information Technology (IT) managers to upgrade their hardware and software unnecessarily. John Gantz, Chief Research Officer at IDC estimated that at least $70 billion was wasted on Y2K work that wasn't really necessary.

More importantly, the glut in IT spending prior to Y2K created a corresponding trough in spending after Y2K which contributed (along with the dot-com bust) to a collapse in high tech stocks, helping to trigger a recession.

So with Y2K, you had a real (but minor) problem, characterized by leading economists as a major threat, creating a misconceived fear which drove panic behavior, resulting in an economic meltdown.

What if much the same thing is happening now?

What if the sub-prime problem is real, but the economists are simply pulling numbers out of their butts, causing everybody to assume it's the huge thing, which is causing the banks to fail, which is, in turn, causing the lending crisis, which is causing the stock market to crash.

I'm not saying that anyone is doing this on purpose, mind you. I'm only pointing out that economists can be suckered along with everybody else. Like Yardeni and Y2K.

On one level it doesn't matter, of course, because even if the source of the fear is irrational, the impact of that fear is all too substantial.

But if it turns out that I've lost 25 percent of my net worth because a bunch of economists went all "chicken little" on us, I'm going to be royally P.O.-ed.