Some readers may recall an earlier post in which I explained that many of the failures of the attempts at government intervention have to do with the fact that the government is exercising discretionary power that change the rules of the game on a largely ad hoc basis. Particularly, I referenced Roger Koppl’s theory of Big Players, in which a large entity that is largely immune from the profit-loss mechanism wields significant discretionary power. Under these circumstances, such discretionary power can be a major source of uncertainty and therefore causes market participants to shift resources away from productive uses and toward predicting the behavior of the Big Player (incidentally, Axel Leijonhufvud makes a similar point in his classic, “Costs and Consequences of Inflation“).
In the earlier post, I referenced the ad hoc behavior of the Treasury in developing the bank bailouts and suggested that, consistent with the theory of Big Players, such behavior only served to generate uncertainty. I have not been alone in this analysis. For example, John Taylor’s new book similarly criticizes such ad hoc behavior on the part of the federal government as exacerbating the crisis.
Thus, I was not at all surprised to read the following story from NPR, in which one bank CEO explains why he decided to give the TARP money back:
[CEO Joseph] DePaolo says Signature returned the money for three reasons: Legislation passed Feb. 17 would limit the compensation for salespeople, make it difficult to recruit bankers and cause uncertainty.
“With the new legislation, they changed the rules in the middle of the game,” he says. “We didn’t know how many more rule changes or legislation would come down, maybe telling banks, ‘This is what you can do with your lending. This is what you can do with your clients.'”
I will reiterate a point that I made in the earlier post:
If the government really wants to help, they can start by setting the rules now and following through on their promises. So long as they continue to change the rules on a daily basis, uncertainty will prevail, the stock market will remain volatile, and the credit markets will remain frozen.