Whatever else might be said about the current state of our financial markets, it’s safe to say that right now they are a mess.
How big a mess, how long it will take to clean up, and how dangerous the mess really is are all the subject of vigorous debate.
What we do know for sure is that the government officials in charge of trying to steer our economy are in a near panic—and that in and of itself should be enough to cause the rest of us to panic. In fact, it has caused the rest of us to panic.
What we should panic about, though? The underlying economic challenges, which may or may not be dire? Or the policy choices being made in Washington, which almost certainly will leave American taxpayers on the hook for billions in new obligations and completely rewrite the rules for finance in America?
It’s hard to say. After all, Hank Paulson and Ben Bernanke are smart guys with the most information at their disposal, so it’s natural to defer to their judgment about just how bad things are right now.
But on the other hand, as government officials charged with attempting to manage the economy they have a natural inclination to seek government solutions to whatever problems they see the economy confronted by.
That’s a pretty dangerous inclination. Not only are Bernanke and Paulson recommending to Congress that $700 Billion—comfortably more than the entire defense budget of the United States—be placed into their hands to purchase assets of unknown worth with precious little oversight, but now Congress is getting into the act by rewriting the proposed legislation to include a number of populist reforms which could hobble Wall Street’s recovery.
Whatever the dangers facing our economy, it would be very safe to say that Washington’s actions up until now have harmed more than they have helped. Financial markets cannot abide panic, and panic is what Washington has given them. Treasury Secretary Paulson testified before Congress that the average American should be scared about what is happening on Wall Street, and President Bush’s actions have amplified people’s concerns over the credit crunch.
Who wouldn’t be panicked under such circumstances?
I would feel a lot more confidence in the recommendations being pushed by the Administration if the Fed and Treasury appeared to have been acting off a plan from the very beginning of this crisis. The wavering between bailouts for some, not for others, then the nationalization of AIG and now finally the prospect of an across-the-board bailout has undoubtedly created or worsened the fear that we see on Wall Street and Main Street.
Arnold Kling has written an essay arguing that the current talk of an across-the-board bailout may be the cause—not the cure—of the current seizure in the credit market. “The market could be clogged because the prospects for a bailout are destroying the motivation to sell mortgage securities. If you sell this week and take a big loss, you will look pretty stupid if there is a bailout next week where comparable securities fetch much higher prices.”
Washington needs to get its act together because whether we like it or not it is now the biggest player in the market. By intervening in the markets in an ad hoc fashion and now dithering, policymakers have created a perfect storm—panic in the markets and utter dependence upon non-market forces in Washington DC to impose order. Washington has declared it will act, and until it does nobody else will.
As usual, the most frightening words in the English language are “I am from the government and I am here to help you.” Unfortunately, given the mess that has been created at least partly by Washington, it seems that Washington is the only place left that help might arrive from.
