For me, the biggest loss of faith is in the transparency of the markets due to the complexity of todays investment vehicles. The market can't serve it's purpose of being a weighing machine if there are vast segments of the economy (like the MBS's) that only hop on to the scale during a disaster and show up as black boxes most of the time to most players.
I also agree with Greenspan when he recently conceded:
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief”.
Our whole stock market is predicated on the idea that companies and shareholders have the same interest, namely growing and protecting the market value of the company.
But then Moody's goes and digs its grave by knowingly giving bogus ratings to MBSs. And lots of companies buy these MBSs without adequate due diligence, digging their own graves. So why would they have done such a thing, which appears to be against their self interests? I think it actually was in the self interests of the decisionmakers at Moody's and other companies to dig those graves. The employees who did this stuff thought they could take the profits now, which would make them look like stars and increase their bonuses, and then move on to another company before the shareholders had to clean up the mess. Or hope that a rising market would hide their tracks.
This points out a fundamental conflict of interest: Different players have different time horizons. A CEO is financially motivated by the compensation he receives while he is CEO; If the company falls over and dies the day after he leaves, no skin off his back. With CEOs turning over every few years, they aren't looking at the big picture.
The shareholder on the other hand is affected by results (and predictions of results) for the entire lifetime of the company.
None of these players are affected by collateral damage (e.g. if the failure of their company takes down the US economy as a whole). In fact there's now a perverse incentive: If a company can shift their failures into an area that would cause collateral damage to others, then they might be able to count on the government to step in and bail them out.
This disconnect between the self interests of the players and the markets is not new, but I think technology and lax regulation have made it easier for the players to hide things from the market, and therefore the market may not be as good of a weighing machine as it had been in the past.
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