Many writers of investment books approach the topic of saving and investing without any clear economic theory. Value investors often share the sentiments of fund manager Peter Lynch, who said, "If you spend 13 minutes a year on economics, you have wasted 10 minutes."

At the other end of the methodological spectrum, MBAs trained in efficient portfolio theory disdainfully characterize the suggestion that investors should at times not hold any stocks in their portfolios as "market timing" — the investment world’s equivalent of casino gambling.

It is not possible to approach macroeconomic questions without an economic theory. A sound economic theory may or may not yield any useful insights for investors, but a false one is almost certain to mislead.

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Private companies that lend their own money are generally very careful with their loan underwriting, and they know how to collect the money they lend. Most reputable finance companies use simple accounting procedures and have adequate loan reserves, and conservative financial leverage. These firms generally understand derivatives and don’t rely on them to manufacture profits. They’re not sharks.

This article is not about the private companies that use sound lending practices. It’s about the many big financial players, the giant hedge funds, major money center banks, and Watt Street Investment banks. These are the "Big Boy Sharks" who created $2 trillion in subprime mortgages, using hubris and Gordon Gekko-style greed, and have recklessly used leverage and risk with other peoples’ money to book corporate profits. A typical example of this is the over-levered Bear Stearns hedge funds investing in crappy mortgage securities that have now left many investors scratching their heads while they search for answers as to why their equity vanished overnight.

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