Government panic has fueled crisis

TEXT OF COMMENTARY

Renita Jablonski: We’re launching an occasional series today that looks at possible solutions for the financial crisis. The first installment of “What’s the Fix?” comes with thoughts on the government’s part in all of this. Here’s commentator Susan Lee.

Susan Lee: We’re about six months into the worst financial crisis since the Great Depression. The question on everybody’s mind: How do we get out of this? Well, I’ve got some bad news here: There is no way out — not after Washington showed it can panic with the best of them.

Consider what’s happened. The government has motored out a $700 billion plus bailout. That’s a lot of bucks considering nobody even argued the bailout would work. In fact, the only impact on which everybody agrees is that the bailout will push the budget deficit up to almost a trillion dollars and require higher and higher taxes.

The government has also nationalized almost half the banking system. And so far, the only result is that banks want still more money. And don’t forget Fannie and Freddie. By taking over these two mortgage giants, the government has pretty much taken over the home-mortgage market. Yet mortgage rates have climbed, while house prices continue to drop.

OK, maybe that’s unfair — these things take a while to work. But this display of utter panic has resulted in massive uncertainty. And there’s nothing the markets hate more — and fear more — than uncertainty. No wonder investors have become so risk averse they’ve taken trillion of dollars out of the stock market.

Six months ago, the country was headed into a recession. The drop in home values made that inevitable. The best course of action would have been to take our very large lumps. Most likely that would’ve meant a short, maybe steep, recession. And yes, lots of firms in the financial sector would have gone bust and investors would have lost money.

But now? By aggravating the financial crisis and scaring the pants off investors, the federal government has almost insured a very bad, very long recession. It’s not often one gets to quote Napoleon, but here goes: “In politics, stupidity is not a handicap.”

Jablonski: Economist Susan Lee writes a weekly column for Forbes.com.