A lot of money has been lost this year. Only yesterday, $600 billion in value was wiped off S&P 500 firms. That’s not to mention the hundreds of billions worth of writedowns and losses previously suffered by financials as a result of subprime exposure.

What does this mean for the future?

One outcome will be a rise in dividend and bond yields, says Bill Bonner in The Daily Reckoning. That’s because the optimism of recent years will switch to pessimism, and lenders will demand much higher yields for their investments.

Treasury yields are negative when calculated against inflation. This can’t last forever.

More from Bill:

The financial industry gained more than any other from the big credit expansion. It makes sense that it should be the industry that suffers most when credit goes the other way.

In that regard, history is a good indicator of what to expect. You can guess about the very broad patterns of the future, based on what you know about the past…and of your fellow man.

We know, for example, that investors tend to go from one extreme to another. At once, they are afraid of credit…and then they feel as though credit were their best friend in the world. And they go from feeling very optimistic about the future…to feeling very pessimistic.

These feelings have market consequences. When they are upbeat and sans soucis they are willing to lend at very low rates of interest, for example. Why not? They’re sure they’ll get their money back. And when they are feeling lucky, they’ll invest in wild-eyed schemes and half-baked projects too. Everything is going their way; so why not?

But then, the mood changes. The schemes fail. Money is lost. And gradually people come to believe that the future holds more bad days than good ones. Yields rise – as they ask for higher rates of interest before lending money. Not only are they afraid that they may not get their money back, they’re also afraid that the money they get back may not be worth as much as the money they lent out. At the peak of the yields cycle in ‘82, for example, investors wanted 14% interest before they’d lend money even to the U.S. government!

When they get gloomy, they want higher cash dividends from their stocks too. Gone are the days when they believed they could just buy stocks and get rich. They come to believe that if a stock is not paying its way – with dividends each year – out it goes. During the Great Depression, for example, stock market investors sold stocks down to such a low level that they paid an average dividend of more than 10%.

We’re still a long way from there. The yield on the ten-year T-note is above 3.7% – but still about 200 basis points below the level of consumer price inflation. Which is to say, real yields on Treasury paper are negative. Still, they’re better than dividend yields, which average only about 2.5%. Investors still believe that their stocks will go up, so they’re willing to accept dividend yields of less than half the current CPI.

But we’re headed in the right direction. Lehman is going bust. AIG is struggling…hoping for a $40 bailout from the government. Houses in California are down 30%…and still sinking.

Alan Greenspan, who bears more responsibility for the present state of financial affairs than anyone, says this may be a “once in a century,” event. This time he could be right…

Source: It’s Lehman’s Turn