Tuesday, October 07, 2008

The SARS comparison 

Kevin Hassett today:
Panics stop when citizens understand that those with the disease have been identified and quarantined, know what the treatment options are and can take sensible precautions to avoid infection. If we never developed a test for SARS, we would probably still be panicked. Without such information, herd behavior can drive beliefs to crazy places, as appears to be happening in financial markets.

The Singapore response sets a goal for policy makers. They need to tell us who has the disease, how they will quarantine those who have it, what the treatment will be if it's discovered, why that treatment will work, and the steps we can all take to avoid infection. They need to do this with facts and transparency, not with spin and assertion.
Hassett criticizes the Bernanke/Paulson policies for not being able to identify which banks that are troubled and which are not. But why would government be any better able to tell us this than the private sector? There is no test that tells us which banks have enough troubled assets to affect solvency when the market fails to provide a price for them. The purchase of enough of those assets to make a market price should be sufficient to provide that kind of information to private decisionmakers, who can then figure out whether or not a bank should go broke.