We don’t mean to overdo the market reaction to Tim Geithner, but we thought it was particularly noteworthy in light of a recent WSJ op-ed from Stanford economist John B. Taylor who claims it was not the Lehman collapse, but rather the government’s reaction to the Lehman collapse, which spurred the major panic last September. Here’s his retelling of the history:
While interest rate spreads increased slightly on Monday, Sept. 15, they stayed in the range observed during the previous year, and remained in that range through the rest of the week. On Friday, Sept. 19, the Treasury announced a rescue package, though not its size or the details. Over the weekend the package was put together, and on Tuesday, Sept. 23, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the Senate Banking Committee. They introduced the Troubled Asset Relief Program (TARP), saying that it would be $700 billion in size. A short draft of legislation was provided, with no mention of oversight and few restrictions on the use of the funds.
The two men were questioned intensely and the reaction was quite negative, judging by the large volume of critical mail received by many members of Congress. It was following this testimony that one really begins to see the crisis deepening and interest rate spreads widening.
The realisation by the public that the government’s intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks.
So here we are, with another TARP-like scheme that hasn’t been fully thought out yet and a market that’s tanking. Forgive us for drawing some historical parallels.