The Doubt Was Already There

Steve Chapman with an excellent post on Reason:

"Instead of stimulating productive activity by removing doubt, it has impeded it by multiplying doubt. It has also encouraged lenders to hold off dealing with their bad debt in hopes of getting a better deal from the Treasury than they can dream of getting from anyone else. But postponing the banks' rendezvous with reality will not speed recovery.

The sheer size and unprecedented nature of the intervention generates a different kind of uncertainty—about how extensively the federal government will immerse itself in the economy from now on. The spectacle of Washington nationalizing private assets is bound to dishearten millions of investors who think that generally, the most helpful economic role for government is staying out of the way.

The rescue surrenders an important principle: that private sector mistakes should be borne by the people who make them. If the bailout means we may all get the bill anytime a company implodes, it will undermine the critical incentives of the market. In the long run, that will not strengthen the economy but weaken it."

Here's my response:

I know that you're not going to like hearing this, but the uncertainty was caused by the government not bailing out Lehman. The reaction of the credit markets showed that people were expecting a bailout, and when they didn't get one, they started to panic. believing that they might be on their own. I'm not defending this belief or the bailout here, but simply calling attention to the real conditions under which the market and investors were operating. Sadly, a lot of people, including you, it seems, didn't realize how far we've already gone done the road of government guaranteeing bailouts such as this one in a crisis. I've always been in this for the long run, so, although I agree we're going to have to answer some hard questions about government intervention in the future, maybe this time will begin with a realistic assessment.

Now, again, Chapman is making great points going forward. But we need to settle this crisis with the cards that we have been dealt, i.e., the government had implicitly, for sure, and obviously, I think, guaranteed that it would intervene in a crisis such as this. So, for this time, game over.

Now we need to develop a long term strategy to reduce the risk of such crises with some regulation, minimal, but effective, and slowly move away from the need and risk of government intervention. But, here's the thing: if governments not going to intervene,that needs to be made perfectly clear from the beginning, i.e., agreed to as a matter of clear policy. Otherwise, the government will be expected to intervene in crises such as this.

Arguing these kinds of issues during a crisis is not going to favor government not being involved. That must come in less troubled and more thoughtful times.