Credit-market jitters are back. Investors are scared and panicked. Fear and emotionalism are prevalent. The stocks of some of the largest banking institutions in the world are being treated like start-ups.

But the volatility in financial stocks signals the end of the credit cycle. When the credit cycle ends, banks start to clean up their balance sheets. Bad loans made during good times are written off, and the focus shifts to rebuilding capital. The actors in every credit cycle change, but the story is always the same. In the last cycle, the write-downs were on technology and telecom loans; in the previous cycle, it was emerging market debt; prior to that, commercial real estate; and in the early 1980s, energy firms were the culprits.

In the current credit cycle, structured finance is the linchpin -- think collateralized debt obligations (CDOs), asset-backed securities (ABSs), and structured investment vehicles (SIVs). The Ph.D.s on Wall Street were once again wooed by the elegance and cleverness of their own inventions -- and, of course, by the piles of cash these vehicles generated for their employers. As is often the case with this crowd, common sense and business savvy were lacking -- "simple is sophisticated" is absent in the Ph.D. finance curriculum.