Our Timid Government Is Killing Us

Second, there has to be a fix to the Lehman counterparty issue. The biggest single underlying reason for the recent credit freeze-up is the complete lack of trust between counterparties.

This trust was destroyed, and a multi-trillion-dollar marketplace (credit default swaps) hamstrung, by the disorderly failure of Lehman. Even if the government does not do anything directly, the least it should do is to make it publicly known that any future failures of financial firms will include a backstopping of the counterparty obligations. Just as the increased FDIC insurance will prevent bank runs, this kind of statement will actually prevent the failures of the likes of Morgan Stanley and Goldman Sachs.

The Fed and Treasury do not have the luxury of adopting a "wait-and-see" approach right now. There is no room for timidity. Shock and awe is what is needed, not more incrementalism. That Fed chief Ben Bernanke only cut rates by 50 basis points during the global intervention is underwhelming at best. Fed funds were 1% in 2003, and we weren't even close to the precipice we're on now. What rainy day is Bernanke preserving his bullets for? Once again, Bernanke has squandered another "bullet" with his grudging incrementalism. When Paulson speaks about plans for deploying the TARP, what is he trying to accomplish by saying that he is still "weeks away" and that "not all institutions" can be saved? Is he trying to downplay expectations from current lofty levels?

It's a shame that so many potentially assuaging actions have been rendered impotent by the bumbling efforts of our government. To have any hope of curing the patient, the doctor must first display confidence in his or her ability to find the cure, and then be systematic in the administration of the cure. Our government has done neither, and it is resulting in unprecedented wealth destruction that is making a Depression scenario more and more likely with every passing day.