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It’s not liquidity, it’s uncertainty ...
Posted by: McQ on Wednesday, November 19, 2008

Why do we continue to see disruption in global markets?

Two words: Hank Paulson.

As the Heritage Foundation points out:
By the end of September, Paulson was asking Congress for $700 billion in funds he claimed would be used to buy mortgage relates assets from U.S. financial institutions. Less than two weeks after Congress gave Paulson his money, the Treasury secretary switched course and used the funds to buy equity shares in banks. Many of the banks did not need or even want Paulson’s money, but Paulson forced them to take it, hoping to set the stage for a massive consolidation of the banking sector.

Then just last week, Paulson shifted gears again. Now he is “exploring strategies” to purchase stock in non-bank financial firms, purchase consumer credit securities, and subsidize mortgage foreclosure mitigation efforts. There are specific problems with each of these policy proposals, but Paulson’s announcement last week crystallized a much larger problem: Instead of being a source of market stability, Paulson has become perhaps the single most disruptive force in the global economy.
As George Mason Economist Russell Roberts explains, markets hate uncertainty:
When no one knows how the rules of the game are going to change — and they seem to change from week to week — who wants to take a risk? Who wants to borrow money? Who wants to invest? Business and consumers are hunkering down, waiting for the storm of change to pass.

The problem isn’t liquidity. It’s uncertainty. Paulson doesn’t realize that his erratic attempts at creating liquidity are creating the uncertainty that makes liquidity meaningless. …

The great economist F.A. Hayek wrote that “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

With each improvisation, Secretary Paulson is proving how little he knows about what he imagines he can design.
You'd almost like to write off Paulson's actions as 'bait and switch'. That would imply he had a plan he didn't think he could sell and is now implementing his real plan. Unfortunately, I, and I'm sure most of the rest of the financial world, have now come to the conclusion that he hasn't a clue and is simply reacting (and shooting from the hip) to things as they develop. Hardly actions which create the confidence necessary to bring certainty back into the markets.
 
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he hasn’t a clue
Amen to that. His NY Times piece yesterday was one of the starkest advertisements of personal cluelessness and incapacity I’ve ever read. If anyone —like maybe a president or somebody — were actually in charge of this administration, they’d lead Mr. Paulson gently but firmly out onto a nice secure terrace somewhere and give him a bowl of warm porridge to drool into until maybe later he could have some nice safety scissors and colorful magazines to amuse himself with. We’d all be a lot better off.
 
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