November 25, 2008
Like, Say, Shaq?
Blog friend Josh Hendrickson at Everyday Economist has an interesting post with a very smart take on the TARP program, which he has consistently opposed. I'd love to read the book by Roger Koppl which inspired the piece but 66 pounds is a little rich (at current exchange rates anyway).
The idea is that big players such as the US Treasury acting in a market without rational market goals will distort the markets and preclude clearance and price discovery.
The effect of this discretionary power is to increase uncertainty within the financial markets. Firms that receive capital infusions refuse to increase lending precisely because the rules are changing on a daily basis. The same goes for investors who must not only predict what the market is going to do, but also the behavior of the Big Players. Of course, the ability to predict what the Treasury and the Fed are going to do next is substantially difficult. The result is the herd-like behavior that has been prevalent in the stock market for the last few months. When there is a high level of uncertainty in markets, participants start relying more on what they believe that others believe than the prospective yield of a particular investment. The empirical evidence presented by Koppl and his colleagues confirms these claims. Uncertainty breeds uncertainty.
I've been the lonely voice around here for TARP. While I am not ready to capitulate and attack Paulson, this argument is pretty hard to contradict. Economics and Markets Posted by John Kranz at November 25, 2008 12:02 PM
"Firms that receive capital infusions refuse to increase lending precisely because the rules are changing on a daily basis."
I'm glad to see someone else say it. Austrians like me have been saying this since the Bear Stearns fiasco -- after all, Austrian Business Cycle Theory is predicated on the idea that government intervention in markets introduces errors. Systematic errors, in fact, not just occasional misjudgments that free markets experience.
And ever since TARP was introduced, I and other Austrians have pointed out that it's not a crisis of liquidity (there's plenty of that), but a crisis of confidence. And TARP prevents credit markets from correcting themselves by further discouraging lending. It's bad enough when lenders are afraid a borrower will go under, but now there's a risk the feds will take over a borrower. Or, why lend your own money to someone, when you can wait for the feds to give you taxpayers' money to lend?
Posted by: Perry Eidelbus at November 25, 2008 12:58 PM | What do you think? [1]