Wealthy New Yorkers are trimming their spending, not necessarily as a way to save money, but to feel in control in an uncertain economy.

The financial crisis in the United States has been going on for seven months now, and many people probably feel as if they should understand it.
But they do not, not really.
The part about the housing crash seems simple enough.
With banks whispering sweet encouragement, people bought homes they couldn’t afford.
And the American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it.
Now those same Americans are falling behind on their mortgages and the repercussions are spreading across borders.
But the overwhelming majority of homeowners are still doing just fine.
So how is it that a mess concentrated in one part of the mortgage business ? subprime loans ? has frozen up the credit markets, sent stock markets gyrating around the world, caused the collapse of Bear Stearns, left the American economy on the brink of the worst recession in a generation and forced the Federal Reserve, America’s central banking system, to take its boldest action since the Depression? I’m here to urge you not to feel ashamed.
This may not be entirely comforting, but your confusion is shared by many people around the world who are in the middle of the crisis.
“We’re exposing parts of the capital markets that most of us had never heard of,” Ethan Harris, a top economist at the investment bank Lehman Brothers, said.
I spent a good part of recent days calling people on Wall Street and in the government to ask one question, “Can you try to explain this to me?” When they finished, I often had a highly sophisticated follow-up question, “Can you try again?” more times he cuts rates and cheers Wall Street.
As Mr. Bernanke himself has suggested, the only thing that will end the crisis is the end of the current decline in the American housing market.
So let’s go back to the housing boom that started this cycle.
That was in 1998, when large numbers of people decided that real estate, which still had not recovered from a dip in prices from the early 1990s, had become At the same time, Wall Street was making it easier for buyers to get loans.
It was transforming the mortgage business from a local one, centered on banks, to a global one, in which investors from almost anywhere could pool money to lend.
The new competition brought down mortgage fees and spurred innovation, much of which was undeniably good.
As is often the case with innovations, though, there was soon too much of a good thing.
Many, with a lot of cash from Asia’s boom or rising oil prices, demanded good returns.
Wall Street had an answer: the so-called “subprime” mortgages.
I emerged from it thinking that all the uncertainty has created a panic that is partly irrational.
That said, the crisis isn’t close to ending.
Ben S. Bernanke, the Federal Reserve chairman, won’t be able to wave a magic wand and make everything better, no matter how many more times he cuts rates and cheers Wall Street.
As Mr. Bernanke himself has suggested, the only thing that will end the crisis is the end of the current decline in the American housing market.
So let’s go back to the housing boom that started this cycle.
That was in 1998, when large numbers of people decided that real estate, which still had not recovered from a dip in prices from the early 1990s, had become At the same time, Wall Street was making it easier for buyers to get loans.
It was transforming the mortgage business from a local one, centered on banks, to a global one, in which investors from almost anywhere could pool money to lend.
The new competition brought down mortgage fees and spurred innovation, much of which was undeniably good.
As is often the case with innovations, though, there was soon too much of a good thing.
Many, with a lot of cash from Asia’s boom or rising oil prices, demanded good returns.
Wall Street had an answer: the so-called “subprime” mortgages.
As the U.S. mortgage industry went global, investors sensed a sure bet.
Because these loans go to people stretching to afford a house, they come with higher interest rates ? even if they are disguised by low rates at the start ? and thus higher returns for the lenders.
These mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or C.D.O. Once bundled, different types of mortgages could be sold to different groups of investors.
Investors then increased their returns further through leverage, the oldest strategy around.
They made $100 million bets with only $1 million of their own money and $99 million in debt.
If the value of the investment rose to just $101 million, the investors would end up doubling their money.
Homebuyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody’s Economy. com.
The Federal Reserve under Alan Greenspan helped make it all possible when it sharply reduced interest rates in a series of moves intended to prevent a deep recession after the technology bust of 2000, and then keeping rates low for All these investments, of course, were highly risky.
Higher returns almost always come with greater risk.
But people ? by “people,” I’m referring here to Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm, overseas investors and a majority of American homeowners ? decided that the usual rules did not apply because home prices in America had never fallen before.
Based on that idea, prices rose ever higher ? so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall.
It was a selfdefeating prophecy.
And it largely explains why the mortgage mess has had such ripple effects.
Last summer, many policy makers were hoping that the crisis would not spread to traditional banks, like Citibank, because they had sold off the underlying mortgages to investors.
But it turned out that many banks had also sold complex insurance policies on the mortgage debt.
That left them liable when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by quickly selling their house for a profit.
Many of these bets were not huge.
But they were often so highly leveraged that any losses became magnified.
If that same $100 million investment were to lose just $1 million of its value, the investor who put up only $1 million would lose everything.
That’s why a hedge fund associated with the prestigious Carlyle Group collapsed recently.
“If anything goes awry, these dominos fall very fast,” said Charles R. Morris, a former banker who tells the story of the crisis in a new book, “The Trillion Dollar Meltdown.
” This toxic combination ? the number of the bad investments and their potential to grow ? has shocked Wall Street into a state of deep conservatism.
So firms are now hoarding cash instead of lending it .
The conservatism has gone so far that it is affecting many solid, wouldbe borrowers, which, in turn, is hurting the broader economy and aggravating Wall Street’s fears.
Many economists now argue the only solution is for the American government to step in and buy some of the unwanted debt, as the Federal Reserve began doing recently.
There is no doubt that giving handouts to Wall Street lenders or foolish homebuyers is deeply distasteful to many people in business, but at this point, the alternative may, in fact, be worse.
Bubbles lead to busts.
Busts lead to panics.
And panics can lead to long, deep economic downturns, which is why the Federal Reserve has been taking unprecedented actions to restore confidence.
“You say, my goodness, how could subprime mortgage loans take out the whole global financial system?”
Mr. Zandi said. “That’s how.”