Robert J. Samuelson in the Washington Post: Panic is the Enemy

What’s occurring now is a frantic effort to prevent a modern financial disintegration that deepens the economic downturn. It’s said that the $700 billion bailout will rescue banks and other financial institutions by having the Treasury buy their suspect mortgage-backed securities. In reality, the Treasury is also bailing out the Fed, which has already — through various actions — lent financial institutions roughly $1 trillion against myriad securities. The increase in federal deposit insurance from $100,000 to $250,000 aims to discourage panicky bank withdrawals. In Europe, governments have taken similar steps; Ireland and Germany have guaranteed their banks’ deposits.

The cause of the Fed’s timidity in the 1930s remains a matter of dispute. Some scholars suggest a futile defense of the gold standard; others blame the flawed “real bills” doctrine that limited Fed lending to besieged banks. Either way, Fed Chairman Ben Bernanke, a scholar of the Depression, understands the error. The Fed’s lending and the bailout aim to avoid a ruinous credit contraction.

The economy will get worse. The housing glut endures. Cautious consumers have curbed spending. Banks and other financial institutions will suffer more losses. But these are all normal symptoms of recession. Our real vulnerability is a highly complex and global financial system that might resist rescue and revival. The Great Depression resulted from the mix of a weak economy and perverse government policies. If we can avoid a comparable blunder, the great drama of these recent weeks may prove blessedly misleading.

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Posted in * Economics, Politics, Credit Markets, Economy, Housing/Real Estate Market, Politics in General, Stock Market, The September 2008 Proposed Henry Paulson 700 Billion Bailout Package

4 comments on “Robert J. Samuelson in the Washington Post: Panic is the Enemy

  1. Harvey says:

    I remember reading an article, complete with photos, in the Orlando Florida Sentinel newspaper, where one citizen made the statement “..why should I work at minimum wage when I can get all this free money?..” (circa 1983 or so). This was during the time of another great economic upheaval that included home loans at 12% interest.
    I also am trying to remember if I just recently read a statement to the effect that some banks started up anew just a few years ago just to get a hold of that low-interest money. Can anyone add fuel to this flame??

  2. New Reformation Advocate says:

    I am no economist. My Ph.D. is in New Testament Studies, not anything remotely connected to modern economics. But Samuelson’s point seems wise to me.

    Seems like it amounts to the famous line of FDR (who was not notably successful at combatting the Depression until WWII came along):

    “The only thing we have to fear is fear itself.”

    Ot inept, panic-driven government responses to a crisis that only aggrevate the problems.

    In a climate of fear and uncertainty such as we now face, we who are practicing Christians should be able to counteract the widespread sense of panic because of the supernatural serenity we enjoy, trusting a faithful God who will always take care of us. If people see more of a “peace that passes all understanding” in us, they might be more attracted and more inclined to wonder what our secret is.

    David Handy+

  3. Irenaeus says:

    When FDR took office in 1933, the entire U.S. banking system had collapsed. Thus he did have a financial panic foremost in mind when he declared that “the only thing we have to fear is fear itself” [cf. NRA in #2]. No bank call pay all its depositors cash at once. So, in the absence of deposit insurance or emergency loans, a bank panic is a self-fulfilling prophecy of failure.

    Here’s a longer excerpt:

    “The only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. . . .
    “Our distress comes from no failure of substance. We are stricken by no plague of locusts. . . . Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. . . .
    “Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money, and there must be provision for an adequate but sound currency.”

  4. Byzantine says:

    [i]“Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money, and there must be provision for an adequate but sound currency.”[/i]

    Among other things, this would require that banks return to their role as strict depositary institutions rather than speculators with OPM.