The myth of the rational market caused plenty of mischief when it was applied to personal finance. Those of us that followed the advice to invest our kids' college savings in index funds in the late 1990s, when the S&P 500 was at 1400, see the appeal of a "gap year" now that the index is below 900.

But the spread of financial thinking has caused collateral damage for the culture. Many of us came to view just about everything as an investment--from a college education that was an investment in our "human capital," to houses that were essentially options on the real estate market, to communities that had more or less "social capital" (depending on how many bowling leagues they hosted).

This is a big shift in American society. Generations of Americans looked to a career at corporations like General Motors or AT&T as the surest path to financial security and prosperity. After the bust-up takeovers of the 1980s and the shareholder-driven restructurings of the 1990s, that path was closed. In place of the corporation, Americans were instructed to look to the stock market for economic salvation. Through 401(k)s and mutual funds, most households ended up being invested in the market. And through securitized mortgages (and auto loans, student loans, credit card debt, insurance settlements...), most households ended up being "issuers" as well. (I describe the causes and consequences of this shift in my book Managed by the Markets.)

George Bush's "ownership society" initiative sought to ratify this shift, seeking to privatize Social Security by getting even more household savings invested in the stock market. Some of the characters that Justin Fox describes in his book went along for the ride, as a rational market surely would not let us down. Who can forget that dark comic masterpiece, the Economic Report of the President 2006 (pdf)? Responding to the concern that the American savings rate had turned negative for the first time since the 1930s, and that retirement security was at risk, the Report offered reassurance: "The decline in an often-cited aggregate personal saving rate may not be cause for much alarm for retirement preparedness. Much of this decline can be attributed to spending triggered by wealth increases from capital gains on housing and financial assets." In other words, as long as house prices and stock indices keep going up--as they always do--we will be fine.

We've now seen the consequences of our near-religious faith in financial markets. In the long run, housing prices and the stock market will return. But in the long run, as Keynes might have said, we're still waiting to retire.