I’m no economist, I just orbit in and out of finance as a marketing strategist/MBA working across the FIRE sectors. This crisis has been obvious in coming since LTCM back in the 90s. But derivatives and the like are only one aspect of the go-go nature of things. Credit cards and others are in the same unreality boat, enabled by better transaction monitoring they’ve come to believe that merely cutting off LOC on iffy risks was “managing risk.” They pushed 2005′s Bankruptcy Bill as phase one of the current meltdown – box consumers in with their debt, no exits. Paulson’s POS was Phase Two. On the revolving credit front, Capital One is a good example. Watch them tank shortly

I think you’re fundamentally correct that the past, oh, 30 years of growth in finance was the result of a big fantasy that all of us participated in. Some of us had more to do with engineering it than others, but at any time people could have rejected those ARM loans and taken a closer look at those mortgage-backed securities. Also, remember that the markets got in trouble for doing what they were supposed to do: loan money to people whom they otherwise would not loan money. That was the whole point of Fannie and Freddie – to distort the economy in favor of political ends. It’s sad that this crisis will cause more gov’t intervention when it was government and its privileged corporations that arguably played the most important role in fostering it.

It’s always instructive to take stock of your own life when outside sources of stability break down. I’m really getting into the frugalista philosophy espoused by Wendy McElroy, which is similar to what you suggest: pare your consumption down to things that actually yield value (ideally so you can exchange less of your irreplaceable time for mere money). It’s really about mindfulness – an intentional approach to personal economy just like other aspects of one’s life. The most important transparency is always with oneself.