A Crisis of Confidence: Part II

March 25, 2008 at 2:43 pm

Newsweek just published an article about how a lack of confidence doomed Bear Stearns.

Here are a couple of interesting points from the article:

  • “A company is only as solvent as the perception of its solvency,” Oppenheimer analyst Meredith Whitney
  • Bernanke declared the subprime crisis contained last year even as it was metastasizing
  • The administration has been out of touch – using the crisis to call for making tax cuts permanent and crafting policy primarily around bailing out Wall Street

What seemed missing to me, however, is the link between confidence in money and confidence in our government.

The policies of the last 8 years have undermined confidence in the United States to the point where our credibility is questioned. When a large gap exists between what we are saying and what we are doing, we lose credibility.

After a while, who is going to believe the boy who cried wolf, or, in this case, the government that keeps telling us everything is fine – no need to worry.

Daniel Gross, in Slate, also has an excellent article on the rising lack of confidence in American management.

When President Bush asked OPEC recently to increase the supply, OPEC President Chakib Khelil responded that high prices had nothing to do with OPEC nations not pumping enough oil and everything to do with the “mismanagement of the U.S. economy.”

Crude is up 30% over last year in part because the dollar is down a similar amount. That is to say it seems more expensive to us because our dollar is worth less.

The challenge for our generation is restoring not only markets that people can trust, but a government that people can trust. Until then, I’m afraid we have still only seen the tip of the iceberg as far as the economic downturn is concerned.

For this reason, our country sorely needs an economic policy where we spend within our means and limit our borrowing. It’s not rocket science.

My favorite line from the Newsweek article sums it up:

“Confidence can’t be borrowed from the Federal Reserve. It has to be earned slowly, over time, in part through greater transparency.”