Perhaps greater fool dynamics play into this. However, I am not of the impression that people not in the know thought they were buying things that were destined to collapse in value. Someone told me recently they were watching one of those cable news off-prime time wealth advisory shows and that a caller who had said they were a fireman on $65K a year but had 5 houses, was told by the resident 'real estate expert' that the firefighter was 'doing the right thing' and that owning a lot of property was the 'sure fire way to get rich'. There were and are plenty of people in the industry whose 'expertise' is more or less equivalent to that.

For the people in the know and that hadn't drank the kool-aid- which was a decidedly small community- there was a pervasive sense that the whole thing was corrupt and doomed and why not just make money playing off that knowledge? There was nothing they could do to change circumstances and it was very difficult to profit from the view that things were going down, so they 'kept dancing' a la Chuck Prince, my ex-boss.

The best quote that I can summon to describe what I mean is by Charles Mackay alluding to the Dutch Tulip bubble:

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one

And the bookend to that is that, in an insane society, sanit is considered insane. Witness the derision of 'permabears'.

An unhelpful analytical framework is one that obscures the salient dynamics of a system. A helpful one clarifies them. Talk of chaotic dynamics in the financial system is not particularly helpful when you're not talking about price discovery in an orderly market.

As regards the Newtonian turn of phrase, your summation, "Physical chaos is generally a deterministic phenomenon in Newtonian dynamical systems" is quite right. The salient detail is that this outcome, this policy response and, indeed, many future ramifications, were determined on the basis of 25 years of malign neglect that probably went past the point of no return in 2003, if not before, but beyond question are past it now. As someone observed about the Great Depression, the key to how severe are the ramifications of a financial bubble lays in how deeply the preceding boom led to a misallocation of resources and a generally maladjusted economy. Today we have a huge swath of the workforce dedicated to writing underwriting, trading and managing IOUs. Another huge swath doing manicures and flashy billboards for consumer goods. We have entire Asian economies built on exports to the West. The maladjustments are monumental.

As for how the pyramid collapses, that's easy. Panic, bankruptcy, business shuttering doors. The unknown is dollar crisis, but I would be long those odds. If that happens, you can add hyperinflation and the gone asunder of US banking and finance as we know it for a generation.

PS Another of my all time favorites is here: http://www.braudel.org.br/publicacoes/bp/bp43_en.pdf . Speaking of prescience- that was 1998!

First, when I say malign neglect, I don't mean to say the authorities didn't have a hand in this fiasco outside of deregulation. Nothing could be further from the truth. In fact the authorities, and Alan Greenspan in particular, were instrumental in instilling confidence by routinely bailing out speculators and the asset markets from 1987 to 1992 to 1994 to 1998 to 2001/02 to now.

Second, the PDF I linked is not what I was referring to. Apparently the author has written a new one for the current crisis. He did publish two papers on the Asian financial crisis in 1998 which were spectacular and which I have somewhere. I'll see if I can dig up the link.

http://www.normangall.com/brazil_art6eng.htm

http://www.normangall.com/brazil_art6eng2.htm

I have a feeling this audience will like these...

What Krugman is saying is that the Treasury plan, unless it overpaid for assets, might keep the firesale currently being threatened from precipitating, but it would not put banks on sound footing to restore the provision of credit to the markets, which would ultimately lead us back to where we are now in no short time. That if it did overpay, then the tax payers ought to get a cut (He's right, and right about many of his objections to this plan. However, also wrong which I will get to).

In the context of your analogy that doesn't give me much to work with, he is suggesting the proposal as outlined is insufficient to pull the bridge back from the brink (Woody Allen's shark analogy is probably the most apropos, given that wobbles to a financial system are terminal, as they are self-fulfilling: if the financial system doesn't keep going forward, i.e. lending, it dies. We may very shortly have a dead shark on our hands). The problem is that as you continue to reinforce the bridge, each successive job deals with greater legacy issues, is further from optimal, and increases the likelihood of error (which in this case would be loss of confidence, and bank run).

It should be noted, btw, that Krugman ascribes to the revisionist view of the Depression shared by helicopter Ben Bernanke (who no doubt is 100% behind the Treasury plan) that is about to be discredited. He believes we can navigate our way through this, and that so could have the Fed circa the 1930s. In both cases, he is wrong.

Sarah Palin's views and positions don't disqualify her as a feminist, in my own humble non-feminist opinion. It's her corrupt opportunism and profound dearth of empathy that does that.

In other words, it's not what you purport to believe in that matters- it's why. Not all are gifted with power of intelligence, introspection and good judgment (and how. See for example: modern conservatism).