Even the Smart Guys Don’t Understand the Meltdown

Is the banking bailout a genuine cure or an empty ritual?

The Washington response to the Wall Street financial crisis has been uncomfortably reminiscent of medieval villagers dancing in the town square to wish away an eclipse of the sun. No one knows what the hell is going on, but the situation demands action.

The drama of impending calamity transforms a ridiculous display into something vaguely momentous. And fortunately, no one knows any better. So if the eclipse passes, post hoc ergo propter hoc works just fine, thanks. And if it really is the end of the world, well, at least you don’t have to worry about being beaten up by the pundits.

What we witnessed in Washington last week will not make it into any future editions of Profiles in Courage. And, although it is ridiculous enough, it is way too dark for America’s Funniest Home Videos.

The problem is, of course, eclipses don’t really pose much of a threat, and the current financial crisis not only threatens to send the world into a recession and upend any ability the next US president might have to advance any new initiatives, it also is symptomatic of much deeper and more disturbing problems in the global financial system.

Furthermore, it doesn’t convey fully the fact that Washington’s panic came in response to another panic, that of the financial community, which similarly was trying frantically to grapple with a crisis it understood little better than our political leaders—this despite the fact that both groups had co-authored the flawed system that was now coming undone.

Wall Street was selling off financial stocks because it feared the losses that might come if it did not act. Washington was bailing out Wall Street because it feared the losses that might come if it did not act. But no one knew for sure just what would happen whether they acted or not. No one actually knew fully what the real problem was or is.

Nothing illustrates this point quite so well as asking the core questions posed by the crisis. Go ahead. Make a list of the key questions that really ought to have been answered before the government took any action or devised any strategy.