At times like these, when history hits the fast-forward button, it's important to step back and take a broader view of what's happening and why.
With the federal government's latest and biggest intervention in a state of flux (see here and here), and unfolding in the hothouse atmosphere of a hard-fought presidential election, let's put some larger context around the events of the last few days.
First, contrary to the half-informed pronouncements of so many anchors, reporters, and editors, the nearly 130-point move from intraday lows to highs in the S&P 500 wasn't so much an expression of enthusiasm for the bailout package as it was one of the great short squeezes of all time -- and not just in the financials directly affected by the temporary (we hope) ban on short-selling. Who knows where today's trading will end, but the action isn't exactly the kind of follow-through the bulls would like to see to confirm a sustainable move higher in equity prices.
Second, as Hank Paulson said yesterday on This Week and Meet the Press, the real action is in the credit markets, not the stock market per se. They're related, of course, but the system-imperiling conditions were and are in the credit markets.
Third, and most importantly, there's one fact of life that distinguishes our time from all earlier times: Interdependence. The dawning realization of interdependence, economic, ecological, and otherwise, gave rise to the regulatory innovations of the 20th century, from the Federal Reserve itself to the Environmental Protection Agency.
Beginning in the progressive era of the 1900s and 1910s, surging in the New Deal period, and reaching full flower in the late 1960s and early 1970s, old constitutional tropes about interstate commerce and limits to federal power were swept away by the widespread recognition that what happened in one place mattered for people, institutions, and systems in lots of other places. Developments in technology, transportation, and culture were, of course, the underlying causes of the rise of interdependence, but they can all be subsumed in that broad category. When dollars, debts, diseases, things, people, and ideas can move around the planet with sudden speed, what happens on Wall Street affects Main Street, what happens on one part of Wall Street affects every other part of Wall Street, and and what happens on Main Street affects Wall Street. And, of course, what happens on Wall Street affects London, Tokyo, Nairobi, Istanbul, and Sydney.
Reasonable people can disagree about the details of the latest intervention. Indeed, reasonable people should disagree about them. We think it's more important to get the policy right than it is to get it done yesterday.
But whatever the details might be, the fact of interdependence - -the fact that, alas, Main Street needs a "bailout" of certain players on Wall Street who made enormous mistakes for which we're all paying dearly -- dictates that we shed ideological dogma in favor of pragmatic imperatives.* The alternative -- the freezing of credit for households and small and big businesses alike -- is entirely unacceptable.
As we move forward, however, Main Street has every right and plenty of reason to insist, through the coercive power of the state, that sobriety return to Wall Street. After all, as Warren Buffet put it so well, "the hangover is commensurate with the binge."
* To clarify: Those pragmatic imperatives may well--indeed,
probably definitely do--include things that reach beyond making appropriations and granting more or less unchecked power to Hank Paulson and future Secretaries of the Treasury...which worries us, not as a personal matter, but as an institutional one.
John Helyar, Alison Fitzgerald, Mark Pittman, and Serena Saitto, "Ten Days Changed Wall Street as Bernanke Saw 'Massive Failures,'" Bloomberg, September 22, 2008
Roger Runningen, "Bush Urges Quick Action on Financial Rescue Package," Bloomberg, September 22, 2008
Dawn Kopecki and James Rowley, "Dodd Proposes Giving U.S. Equity Stake for Bad Debt," Bloomberg, September 22, 2008