Re: The Markets & Paulson [John Hood]

http://corner.nationalreview.com/post/?q=ZDk1YTBlNmM5YmY5N2ZmMTE0ZDUzYzViMzk3YzQ2YjE=

I think the case against Treasury's plan remains persuasive. Forcing taxpayers to buy assets at prices above what investors would voluntarily shell out for them — which is the most clearcut definition of the plan — transfers scarce resources from people who made better decisions to people who made worse decisions. It doesn't solve the capitalization problem, and proposing such a massive new federal power over the economy is likely to — and probably has already worked to — spook investors far more about current conditions and the future market environment than whatever confidence Treasury expected to build. Indeed, more generally the series of bailouts can themselves be seen as repeated signals to international investors that policymakers are panicked and desperate. Would you want to invest in such a place?

For all the talk about market psychology, there seems to be little appreciation of the fact that when public officials say reassuring things but do death-defying things, investors learn to ignore what is said and treat every new "remedy" as additional tests confirming a terminal diagnosis. That's why central bankers can slash interest rates in concert and then see investors get more jittery.

I remain convinced that the best response to the initial panic was to propose policies, such as changes in accounting regulation and tax relief, that we wouldn't have come to regret and that signaled clearly to worldwide investors that America would be a more attractive place to earn returns in the future. If intervention in the mortgage markets was warranted, something to reduce the severity of the underyling problem — risk of mortgage defaults, not housing prices per se — would have been preferable, essentially a temporary bailout of homeowners via tax credit or a renegotiation program on steriods. And if intervention in the banking system was warranted, working through existing institutions such as FDIC and the Fed was preferable to creating a new entity at Treasury with unclear intentions and clear long-term risks.