THE PLANK SEPTEMBER 30, 2008
Perception isn’t everything in markets, but it sure is close. If investors think housing prices will go up, they’ll go in for complex derivatives backed by home mortgages. If they think those mortgages will all fail--even if only a small percentage actually do--they’ll run like hell. The same goes for the bailout. It was never going to solve the crisis, though it would have stanched the bleeding. But passing it was intended as a signal to global investors that Washington was serious about intervening, a bid to boost investor confidence long enough to get credit moving again. At the same time, $700 billion in a shaky, opaque bailout plan was hardly the most efficient means to improve confidence. Was there a better way?
In an ideal world, two Fridays ago, President Bush would have gone on national television flanked by Secretary Paulson, Chairman Bernanke, and the House and Senate leadership. He would have assured viewers that he was leading a bipartisan effort to reach a deal to prop up failing banks--banks holding their money and lending to their employers--while protecting taxpayers. He would have explained why a bailout was so important to the average American. He would have reached out to other countries’ central bank heads to coordinate a global response in the interim. And he would have pleaded for patience. By calling it a crisis, Bush and Paulson cashed in more political capital than they had, and they made themselves a target for contrarians and skeptics. But their words became a self-fulfilling prophesy, and by yesterday the markets were freaking out over whether even the Paulson plan would be enough to solve the “crisis.” Instead, he should have said the situation demanded swift but measured action, in effect buying at least a week’s worth of time, during which the White House would hammer out a real deal while whipping the GOP rank-and-file into line.
Tuesday morning quarterbacking? Perhaps. But even with the market implosion and the bill’s failure yesterday, there’s no reason Bush and Co. can’t do exactly this today (or tomorrow, given the holiday). The market is up, as of this writing, on hopes that a bailout plan will eventually pass. People want to hear good news, and a resolute, unified face in Washington would be a welcome turn. (Bush did speak from the Oval Office this morning, but his comments were too early and too vague to have the needed effect.) Putting together such a statement would be a lot harder this time--the rank-and-file have shown their collective power and will probably demand bigger concessions, while Bush will need to appear both chastened and resolved on camera--but the enormity of yesterday’s news probably chastened everyone a little, on both sides. It’s not clear that opponents of the bill were aligned enough to know it would fail; now, seeing the fruits of their labor--$1.2 trillion knocked out of the U.S. economy, thank you very much--they might be less cavalier about wielding their free-market bona fides next time. The important thing, and maybe the impossible thing, is for everyone involved to resist further recriminations and show a unified commitment to a plan. If they don’t, then perceptions will sour, and any plan that manages to squeak past the finish line won’t be much help.