We are coming up on the first anniversary of the week the financial world almost melted down completely.

It was on a Sunday, Sept. 14, 2008, when Merrill Lynch got a shotgun marriage to Bank of America, and on Monday Lehman Brothers filed for bankruptcy. Tuesday saw the Fed arrange an $85 billion bailout of AIG. Crucial markets like the one for commercial paper froze. So threatened was giant blue chip General Electric about meeting its short term financing needs that then-Treasury Secretary Henry Paulson had to guarantee the $1.6 trillion commercial paper market.

Had the Treasury and the Federal Reserve not acted so aggressively last fall, there might well have been a run on Goldman Sachs and Morgan Stanley, perhaps Wells Fargo and JPMorgan Chase. No one will ever know what lurked in the abyss of dark possibilities.

We learned that no one saw it coming--not the Fed, nor the Bank of England, certainly not the Treasury or other finance ministers. Hardly any economists but Nouriel Roubini saw how a meltdown in subprime mortgages would morph into a meltdown in prime mortgages, then credit cards, auto loans, high-yield debt, auction rate preferreds, etc. We also learned that overconfidence in the future together with unlimited cheap money leads to an odds-on bubble. If the private sector was careless, the authorities were blind to disaster through 2007 and most of 2008. Responses were stumbling at first and left investors with a frightening sense of losing control. Their investment advisers did not raise them sufficient cash reserves early enough. The most sophisticated investors--pension funds and endowments--were in denial and remained in denial. They could not fathom that the best of times could turn into thew worst of times.

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