The message from the financial press is no longer "The Economy is Sound". It's "Don't Panic!"

Pale Blue Dot

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Mon Jul-14-08 08:36 PM
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The message from the financial press is no longer "The Economy is Sound". It's "Don't Panic!"

From the Wall Street Journal opinion page:

There Is No Reason to Panic

If Fannie Mae and Freddie Mac were ordinary corporations, the sudden collapse of investor confidence last week would have set them to work on their bankruptcy applications. But they are not ordinary corporations -- and they are likely to survive because their debt securities have been viewed for decades as ultimately backed by the U.S. government. Barring the unlikely event of a credit market loss of confidence in the U.S. government itself, they should be able to attract the necessary financing for continued operations.

The key judgment about their financial condition will not be made by the equity markets, but by their regulator, the Office of Federal Housing Enterprise Oversight (OFHEO). As long as OFHEO believes they are adequately capitalized -- as James Lockhart, the director of the agency, affirmed in a public statement last week -- they will continue to operate: buying, holding and securitizing mortgages as they have for decades. And last night the Treasury and the Federal Reserve announced they would take steps to prop up the two corporations if and as needed.

So there is no reason for stock market panic, nor for handwringing in the credit markets about an imminent default. Indeed, with the Senate finally -- after months of dithering -- passing legislation on Friday for a strong new Fannie and Freddie regulator, there is hope that the government will finally be able to rein in the excesses of these enterprises.

Yet there is little evidence the real lessons have sunk in. Just as the grave risks Fannie and Freddie create for taxpayers are finally being recognized, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson were asking a seemingly compliant Congress to involve the Fed in supervising the largest investment banks -- which will only create similar risks elsewhere in the economy. (More on this later.)

I agree with this analysis from The Big Picture blog:

Of course, the last time this self same page told us not to panic, it was Bear Stearn's David Malpass exhorting us not to Panic About the Credit Market:

"Equity markets have recently lost over $2 trillion in the U.S. and even more globally -- many times the likely amount of mortgage and corporate debt losses in the foreseeable future. This is in part a correction from the sharp global equity run-up through mid-July. Current prices still signal growth ahead."

How'd THAT work out?

How come every time a WSJ editorial tells us not to panic, we learn in subsequent hindsight, that Panicking is pretty much exactly what we should be doing?

By Panic, I mean pulling out all the stops to make sure any virally malignant, planet destroying financial cancer does not metastasize any further, mangling the good and the bad alike (or destroying a planet to make way for an interstellar bypass)?

Is there any reason to expect this chuckle-headed plea is going to turn out any different than the last chuckle-headed plea did?

I don't know about you, but when people start telling me not to panic, I start to wonder if maybe I should be panicking.