Tuesday, October 07, 2008

Restoring Confidence in the Markets

George Bush spoke about that the other day and Dan Froomkin pointed out that as people don't have confidence in Bush as a president they are unlikely to have confidence in what he says about restoring confidence.

Bush is not the only voice which has asked for confidence to be returned. Confidence is that magical thing which would stop people from taking their savings out of the banks or moving all their investments into gold and under-the-mattress funds. I doubt that confidence is easily returned, however.

My old parable about the financial markets as a person turning up at the ER of a hospital with severe and inexplicable bleeding still applies. Of course the bleeding must be stopped and the patient's condition stabilized. Of course.

But the next stage is not just releasing the patient back on the streets with no actual diagnosis or long-terms treatment plans, and that's how I view the current rescue packets. They are like the first-aid at an ER. Yet we are asked to view the treatment as sufficient to give us "confidence" in the patient's future health, even though we don't have a real diagnosis or a real prognosis or any long-term treatment information.

Once again, I'm returning to my frequent pleas to make sure that the markets have proper rules and proper oversight. Installing those now will not cancel the crisis we are in but it's imperative for the avoidance of worse things in the future. It's like long-term medical supervision and care for a patient who was ill enough to turn up at the emergency room.

I also think that it's useful to distinguish between "confidence" and "trust" in the markets. It's trust that we really need, trust that the markets won't suddenly implode and destroy our retirement savings or the value of the most important capital asset most people own: the value of their homes. And for that trust to return we need to understand and treat the ultimate reasons for what ails the markets.