It has long been known that cognitive biases can engender a distorted sense of reality. Even though people may be presented with facts and figures that clearly point in one direction, behavioral mechanisms can prevent them from acknowledging or even seeing the data -- data that might allow them to make a dispassionate and rational, not to mention accurate, assessment of what happens next.
For example, despite widespread recognition of the numerous excesses that took place and imbalances that built up before the credit bubble burst, many observers -- especially those on Wall Street who allegedly have some sort of forecasting acumen -- have argued that the fallout from the bust would be mild and short-lived. Of course, this is ridiculous. Yet they and others (especially stock traders and federal government officials) have repeatedly gone along with such smoke-blowing nonsense.
More recently, those who are deluded by human foibles such as wishful thinking, expectation, neglect of probability, extreme aversion and other biases (see Wikipedia's "List of Cognitive Biases," for the full range of possibilities) have come to the conclusion that the difficulties in the financial sector must be nearing an end, if only because the crisis has been going on for a while. They believe this even though there is plenty of evidence that suggests otherwise. They also ignore the fact that credit continues to contract in the face of aggressive Fed easing and the U.S. economy has almost certainly slid into recession.
And if they were really focused on reality, the facts noted in the following report, "FDIC Fund Strained by Bank Failures May Have to Raise Premiums," would surely help them to understand that now is not the time for a sanguine outlook. Instead, they would be forced to acknowledge that yet another burden will soon be added to the burgeoning list of problems that are already undermining the long-term financial health of the nation's banking system.
The failure of IndyMac Bancorp Inc. and seven other banks this year may erase as much as 17 percent of a government insurance fund and raise premiums for all banks, from Franklin National of Minneapolis to Bank of America Corp.
The closing of IndyMac in July, the third-biggest U.S. bank failure, may cost the fund $4 billion to $8 billion, in addition to an estimated $1.16 billion for seven closures through Aug. 1. Premiums for deposit insurance will likely rise, FDIC Chairman Sheila Bair said in a July 30 interview. A decision on the increase is due by the fourth quarter.
"It's going to be a bloody, expensive mess for the banking industry," said Bert Ely, president of Ely & Co. Inc., a bank consulting firm based in Alexandria, Virginia.
