Financial crises are funny things. There is no war, no plague, no hurricane; no building is destroyed, no factory bombed, no orchard burnt. And yet, suddenly, the whole nation finds itself poorer: You can’t afford your new iPod, or new car, and perhaps if you really needed a new car, you lose your job. And now you can’t afford anything. And all this without so much as a house burning down!
When an invading army marches in, shells the houses, burns the farms, and loots anything not nailed down (and then loots the stuff that is nailed down, after shooting the nailer for making trouble for them) it is clear why people become poor. It’s easy to understand how wealth is lost when factories or roads are destroyed. But what’s being destroyed in this crisis, or indeed any crisis?
The basic answer is trust. Having a bank willing to lend you money is a form of wealth: It lets you smooth out disasters like having a car needed for your job break down when you don’t have the ready cash to replace it. Taking a loan is a much smaller problem than losing your job; it follows that having the ability to take the loan instead of the job loss is wealth. (If you had the money in the bank to replace your car, you would have a smaller problem still, of course, so that’s even more wealth.) This is why there are paycheck-loan joints all over downtowns: Even a really crappy loan is better than some major disaster like being unable to fix your car or go to the doctor. So access to a paycheck loan is also wealth. Not as much wealth as access to a mortgage or car loan, of course; if poor people were rich, they wouldn’t be poor. (Just as money in the bank is better yet than access to a good loan.) But still, some wealth.
However, this form of wealth depends on trust: The bank has to believe that you’ll pay the money back, or rather, that enough of its borrowers will pay the money back that, at the given interest rate, it still makes a profit. And trust, like any other wealth, can be squandered. If I drive my car into a river, I’ll be poorer. If I lend money to someone who doesn’t pay it back, I’ll be poorer. And if a lot of people overestimate the payback rate of their loans, not only will they be poorer, they’ll sharply curtail their trust. There’s only so much trust to go around in a given system; if it’s used on people who can’t pay their loans back, it’s wasted. That’s how a nation loses a really vast amount of wealth without having a single factory bombed.