Market Correction

What exactly is a market correction? What is it that the market is correcting when this happens? Today, one might argue that assets have been overvalued, and the irresponsible trading of financial derivatives resulting from these overvalued assets have led us to the current market correction. So what the market is actually correcting is the fact that it is trading on value that may not actually exist. So I guess the next natural question would be: What is considered to be value that does exist? Merriam Webster defines value as "a fair return or equivalent in goods for something exchanged". If we apply this definition of value to asset values in the financial context, we would have to define the value of financial derivatives as the equivalent in goods or services for an asset that a particular derivative represents. In applying this to an example then: I get a loan from a bank to buy a house for $1m. The bank takes my loan and chops it up into 10, $100K pieces with a higher future value since I am going to pay the bank interest on this loan, and whoever buys it from the bank wants to make an investment in its future value. These 10 pieces (or mortgage-backed securities) are traded in the stock market with other such (future-value based) financial instruments. If I ultimately default on my loan and do not pay the bank, the bank would then no longer have the financial value necessary to fulfill its obligations on the securities it has traded. In this scenario, when did the bank determine value? Was it when they chopped up my loan and sold it, or was it when they determined whether or not I was credit-worthy enough to get a $1m loan? If they didn't think I could pay the loan, they probably would never have given it to me in the first place. However, since they wanted my business because I was willing to pay them interest, they took a "risk" on me. So the value here must lie in the risk right? The less risk that the bank would have to take on me (determined by my credit-worthiness), the more valuable my business would be to them. Conversely, the more of a risk they would have to take on me, the less valuable my business would be to the bank. Isn't this all so simple?

So I ask again. What is a market correction? What is being "corrected"? Is it the value that the bank places on risk? If so, someone is not doing a very good job at evaluating my credit-worthiness. In order to accurately value the risk of giving me a loan, the bank would have to be able to predict the future; whether or not I would be likely to default on my loan. According to current methodologies on determining credit-worthiness, the best indicator of the future, is the past. Given my credit history (and probably liquidity and other such metrics), the bank would likely be led to conclude that I have excellent credit worthiness and thus, am a low risk candidate for the loan. However, how good are we at predicting the future based on the past? Has this methodology (of basing future predictions on past events) succeeded throughout history with enough frequency that we would base an entire market system on it?

The truth is that predicting the future is not possible. We can reduce our risks with these predictions by leveraging knowledge from the past but by placing a monetary value on that reduction of risk, we are creating a market system that will always be plagued by market corrections and other such crises. After all, what one person thinks the future holds is likely to be very different than what another does. Further, the criteria that one person uses to predict the future may not necessarily be the past, but rather something very VERY different. Spiritual guidance even. I have a theory here: People who base their life purpose on spiritual guidance are more credit worthy than those who don't. Don't believe me? I'll bet you a million dollars I'm right.