Apropos of my post last week about the return of the Austrian far-right to the nation's political scene, this weekend's death of Joerg Haider in a car accident obviously makes for an astounding turn of events. It would be nice to think that with his passing, supporters of his extremist Alliance for the Future of Austria would drift back to the mainstream. But while his party will probably dissolve quickly, its ranks will most likely move to the equally xenophobic Freedom Party and its charismatic leader, Heinz-Christian Strache.
Let's start with a basic assumption: The only thing worse in a market than disappointment is confusion. Investors can live with, and if they're smart profit from, bad news, as long as they understand it. But if things are confusing--say, a great, healthy company turns in horrible quarterly earnings, with no clear reason why--then investors get confused, and they panic. Over the last day, Treasury Secretary Henry Paulson offered up a helping of disappointment, topped by a dollop of confusion. First, the disappointment.
This morning's Financial Times headline reads "Central banks launch rate cut." Finally! Not to inflate my own perspicacity, but I've been saying for weeks that what the financial crisis calls for is first and foremost a coordinated international response, preferably one led by the United States. Even if it just meant photo ops, summits, and verbal commitments, the signal that the largest economies are working together is vital to injecting confidence into global markets.
It looks like Congress is seriously considering an increase in FDIC limits from $100,000 to $250,000. Contrary to my post yesterday, this looks like a good idea, particularly in that it will help small businesses holding a lot of short-term cash. Why the change of heart? Commenters, my friend. I don't blog often, so maybe this is an everyday phenomenon, but instead of harsh blowback I received about a dozen intelligent, thoughtful explanations for why this is, in fact, a good idea. I won't re-hash them; read them yourself. I stand corrected, and appreciative.
Both McCain and Obama are now calling for an increase in the deposit insurance cap, from $100,000 to $250,000. Their stated goal is to rebuild confidence among the public and small businesses. But how? Unless you have more than $100,000 in an FDIC-insured account, this means nothing to you (and if you do, why?). And it certainly means nothing to the banks and credit markets. Moreover, while the FDIC has been an important part of the federal response to bank collapses in recent weeks, that role has been to ease the purchase of one bank by another.
Here's one way to think about the bailout rejection: Overseas investors have been an important, if undercovered, aspect of the story. And in a globalized world, they matter as much as our own investors to the overall strength of the U.S. economy. They're the ones who buy our bonds, who invest in our property, who make our dollar the default world currency. Without those things, American economic power would greatly diminish.
Right now, the question everyone is asking about the Paulson plan is: Will it pass? But the real question they should be asking is: Will it work? To read the headlines, you might figure the details had all been hashed out. But the deal is really just a blueprint for a program with a lot of blanks, to be filled in later. In all fairness, details about derivative pricing aren't exactly Pelosi and Boehner's forte, and it's probably a good thing they've left them to the experts. But that leads us to detail number one: Who will be the experts actually shaping the program?
Perhaps because I just finished writing a book of history, I've been thinking a lot about how historians will look at the last few weeks in 25, 50, 100 years. This isn't a very useful frame--since we don't know what will happen tomorrow, we can't know the full context of events happening today. But it has pushed me to ask what really matters in the news cycle and what is just noise. One thing I think historians will look at is how the financial crisis has quickened the dissolution of modern conservatism.
Anyone who dug my post from last night should check out the op-ed in this morning's Wall Street Journal from former SEC Chair Arthur Levitt and former SEC Chief Accountant Lynn Turner. They do a much better job than I could of explaining the importance of mark-to-market accounting in reviving investor trust: "It's like your personal balance sheet," they write.
When all the banks have been bailed out and all the debts paid off, the big takeaway for the historians from the financial crisis will be the complete and utter failure of President Bush as the nation's leader. Set aside the blame for the mortgage meltdown. Set aside whether the Paulson plan is a good idea. At a time when American taxpayers and global investors need to see a strong, confident president in the White House, they simply don't have one. This morning, finally, comes word that President Bush will go on television to address the country tonight.