Sebastian Mallaby calls this "irrationality" on the part of investors. Instead, I think of it as a breakdown in trust of the financial intermediation process. This breakdown is occurring not so much at the level of the average consumer, but among large institutional investors. Money managers who a year ago were willing to accept low risk premiums for securities are no longer willing to do so.
The question now is whether the financial markets will establish a new equilibrium soon or whether there will be further shocks leading to further increases in the risk premium, leading to more shocks, etc. If the equilibrium scenario unfolds, then Mallaby is correct and there are many bargains available to investors. But that could turn out to be a "picking up nickels in front of a steamroller" strategy if the adverse scenario were to unfold.
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