Congress tried late last week to stall the financial crisis by pledging to spend $700 billion on devalued securities held by financial institutions, and by Monday morning it was clear that the pledge wasnâ€™t enough to reassure investors or restart lending. Instead, a classic panic has set in here and around much of the world as public confidence in banks, other financial institutions and the markets themselves nosedived, along with confidence by banks and other financial institutions in most potential borrowers. This panicked mindset threatens the economy more today than the continuing turmoil in the housing and financial markets. Now we have to recreate baseline confidence before we can repair the continuing damage to our financial and housing markets.
Financial and broader economic panics thrive on a combination of huge and unexpected setbacks and a serious absence of information. They unfold when people face enormous uncertainty about matters vital to them, such as the value and security of their homes and, retirement accounts and college savings â€” and see everyone else, including those with the power and position to manage those matters, struggling with the same uncertainty. People feel threatened and powerless to do anything about it not because they have no options, but because they have no basis to evaluate or choose among them, and worry that more unexpected calamities could overtake whatever course they take. Thatâ€™s where tens of millions of Americans â€” and Europeans and Asians as well â€” have found themselves this week. They donâ€™t understand why the value of their homes and investments has plummeted so suddenly, and see that those ostensibly in charge of the economy in Washington and on Wall Street have little grip on of this as well. The result is that spending and investment are shutting down, dragging the entire economy into what seems very likely be the worst downturn since the 1930s.
The remedy to this panic is information, which only the nationâ€™s leaders can generate and demonstrate they understand. For example, the Federal Reserve and the FDIC should have legions of examiners working around the clock re-auditing the conditions of all major financial institutions, starting with commercial banks. The Treasury and Fed could then report to the public on each institutionâ€™s financial health and their confidence in its continuing financial health. The largest group would still be judged healthy; another group could be designated as worth watching, with measures to help it move to the first group; while those in trouble would be identified with a plan of action to help them recover, if possible. Without this information, most people have been panicking that almost every institution and every investment might well be in serious trouble.
This program wonâ€™t solve the capitalization crisis across financial institutions, much less the crisis gripping housing markets which itself has driven so much of the current upheaval. But it would staunch the panic as investors, business owners and families come to feel that they finally know where the problems lie and what the government and nationâ€™s business leaders will do to address them. At the same time, our leaders can finally begin to address seriously the housing and capitalization crises in an economic environment in which businesses and people will be able respond reasonably and predictably.