Why Is This So Hard To Understand?

Jonathan Macey gets it wrong:

"The original Treasury plan -- which called for the transfer of virtually unlimited taxpayer dollars and unlimited spending discretion to Treasury with no judicial or congressional oversight -- sent a very bad signal to the markets. Instead of restoring confidence, this approach to the crisis instilled more fear and panic in the markets.

The Bear Stearns bailout is another example of how the government's short-term fixes are detracting from the markets' efforts to fix themselves. To induce J.P. Morgan to swallow Bear Stearns, the Fed agreed to loan the bank $29 billion on a nonrecourse basis. Fed Chairman Ben Bernanke justified this government backstop on the grounds that a Bear Stearns bankruptcy might have led to a "chaotic unwinding" of financial transactions throughout the economy.

The bailout of Bear Stearns contributed to the general sense of panic in the marketplace. It also hurt other banks' efforts to raise capital and was a contributing factor in the failure of Lehman, which failed to find a white knight because potential buyers (and their shareholders and directors) expected the same sweeteners from Uncle Sam that J.P. Morgan got for absorbing Bear Stearns."

What caused the initial poor reaction was not the government getting involved, but getting involved in such a convoluted and tenuous fashion. When Lehman was left out in the cold, the panic ensued.

Here again, the problem is that the markets were counting on a firm, resolved, and complete bailout all along. If you don't see that, you miss the genesis of the crisis, which began years ago with investors and the markets always assuming our government was coming to the rescue.