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. In the run-up to this weekend's G7 meeting and next week's annual IMF and World Bank summits, Paulson had a fantastic opportunity to call for a coordinated front among the world's leading economies to attack the financial crisis. Instead, he said no, non, nein, and iie. "We have already taken a number of extraordinary bold actions on the liquidity front that I am convinced have been exactly the right policy steps," he told reporters yesterday.
World leaders and policymakers had hoped for something out of these upcoming meetings. Dominique Strauss-Kahn, head of the IMF, was practically begging for some sort of common stand to be taken, announcing that his fund was ready and willing to coordinate any policy coming out of the next ten days. But it is only disappointment they're feeling. This is, after all, the Bush Administration, with its allergy to multilateral action and a likely desire to shore up any scraps of conservative, free-market bona fides it might have left before it closes shop. Investors want more help, but if the Paulson plan, etc. is all they're going to get, well, they can deal with disappointment.
But wait! Yesterday Paulson also suggested, in complete contradiction to his statement regarding multilateral action, that the Treasury would consider taking direct equity stakes in U.S. banks. This is, to put it flatly, state capitalism. More to the point, it is also a drastic escalation from the Paulson plan, and a signal that, perhaps, the administration has not taken "exactly the right policy steps." This is confusion, exactly what the markets don't need right now. Thanks, Hank.