David Dorst, chief investment strategist for Morgan Stanley’s Global Wealth Management group was quoted in the Arizona Republic as saying, “The financials are the bodyguards of the market.”

So, what happens when the money managers manage poorly, or not at all, and the bodyguards let down their guard? The answer is a crisis in the financial market and all signs indicate that we are clearly in one now. Only the full scope of the crisis has yet to be determined.

A lot of theories have been advanced as to how things in the credit market deteriorated to the present state. In one way or another, they all point to poor management and, as a result, heads are starting to roll in the decision-making places.

Much of today’s dilemma has been attributed to declining real estate values from over-building–a fairly regular event. One cannot help but wonder if these top people ever leave their ivory towers and see what is happening down on the ground. Driving around fast-growing areas like Phoenix, Las Vegas, and southern California you cannot escape noticing the enormous amount of residential development taking place. Any prudent manager would have to ask: Where are the people to come from to fill all those houses and apartments? A savvy money manager would also have noticed that, in fact, prospective homeowners were not the only buyers; rather, many were investors hoping to cash in on a quick rise in real estate values and with little or no money of their own invested. Where were the bodyguards when this assault upon our system of credit was being waged?

If the men at the top of our financial institutions were on the same mailing lists that I am on they would have been aware of the overzealous efforts to extend credit to consumers. Such activity should have been a warning sign to the bodyguards. For example, among many other offers of credit, I have received in the mail numerous offers from Citigroup to refinance a mortgage that I paid off years ago. Don’t they check their records or is the strategy just to market credit indiscriminately?

A few years ago several people I know left their regular jobs to hawk mortgages for lenders. As mortgage brokers, as they called themselves, they made easy money for a couple of years. Then the door slammed shut on most of that activity. Today, one is back selling cars, another is delivering pizza and the third is back waiting on tables at a local restaurant. All are waiting for the glory days to return.

The real victims of poor management of the credit markets are homeowners who find themselves owing more than their homes are worth. They are trapped, because if they try to sell their home they will have to come up with the $25,000 or $30,000 at closing. Few, if any, can afford that. Investors who bought such properties with little or no risk of their own assets are simply walking away from their mortgages leaving the lender to deal with the decline in value.

But for sheer unadulterated aggressiveness in credit marketing, nothing tops the purveyors of credit cards. Even now in the middle of the credit crisis, offers and inducements to sign up for a new credit cared arrive daily (3 today). Usually they offer to transfer any balances you might have on other cards to the new card with concessions on interest charges. The goldfish are jumping from bowl to bowl while the lenders pretend to relieve the pressure from your debt.

The foregoing scenario is not new and has been repeated in times past. I can recall at least 4 times when falling real estate prices have wreaked havoc on the credit markets. This time it is more complicated because so many of these mortgages have been bundled and morphed into a security of one sort or another. Responding to questions at the end of a presentation, Fed Chairman Bernanke, referring to these instruments, said, “I would like to know what these damn things are worth. This episode has revealed a weakness in structural credit products.” Amen.

Credit is the lubricant that keeps the wheels of our economy turning smoothly. But it needs to be applied responsibly or you gum up the works. I offer the following as an example of reasonable lending–or not lending.

Some years ago when I was still in the field, one of my policyholders (a local machine shop operator) asked me to arrange a loan with my company so that he could enlarge his building. To my horror the company turned down his loan application. My client said to me, “Let me get this straight–the New York Life says I can afford to pay them $80,000 a year in premiums, but I can’t afford $40,000 per year in mortgage payments.”

I explained that there were 3 reasons they turned down the loan. First, his was a new business without a long record of earnings. Second, he had only one customer (an aerospace company), and if he lost it he was out of business. Third, his plant location was in the direct path of the airport expansion program. Fortunately my client heeded this advice, put on 3 salesmen to cover the West, and bought a new property. Later he told me New York Life saved his business because he lost his one customer a year later and it was replaced by new sales his salespeople generated.

Credit should be dispensed with care rather than reckless abandon or callous indifference.