The Patriot Post® · Financial Reversals

Remember when Treasury Secretary Henry Paulson warned us that the economy was about to collapse unless Congress immediately authorized him to spend $700 billion on “troubled assets” held by banks? Remember when he said banks would never lend again as long as they remained saddled with these bad investments?

You do remember? So it’s not just me. I was beginning to think I had dreamed the whole thing, because a month and a half later, the Treasury Department has yet to buy any troubled assets, and last week, Paulson said it had no plans to do so. Instead the department is using its $700 billion to buy the banks themselves, which I could almost swear Paulson said was a bad idea a couple of months ago. Evidently the Bush administration is still calling the effort the Troubled Asset Relief Program (TARP) for the sake of the acronym, which suggests a cover for something unsightly or embarrassing.

The TARP turnaround is not the only bewildering reversal of economic wisdom we’ve seen in recent months. Here are some of the more memorable:

– Loose credit is bad, and so is tight credit. Loose credit encouraged people to buy houses they couldn’t afford, which raised defaults and foreclosures, which undermined the value of mortgage-related assets, which made financial institutions that held such assets cut back on lending. The solution, according to the Bush administration: looser credit.

– Moral hazard is bad, except when it’s necessary. Government guarantees, such as the implicit commitment to bail out the congressionally created mortgage companies Fannie Mae and Freddie Mac, encouraged lenders and investors to take bigger risks than they otherwise would have, contributing to the collapse of confidence in financial institutions and the credit crunch. In response, the Bush administration has offered more bailouts – of banks, insurers and homeowners, among others – and raised the limit on deposit insurance by 150 percent.

Rising prices are bad, and so are falling prices. As recently as mid-August, we were worried about runaway inflation. In an article headlined “Higher Costs Are Taking a Toll on Business,” The New York Times reported, “rising prices have seeped into much of the economy, led by higher costs for food and energy.” At the end of last month, under the headline “Fear of Deflation Lurks As Global Demand Drops,” the Times warned that reduced consumer demand could lead to “persistently falling prices,” “suffocating fresh investment and worsening joblessness for months or even years.”

– Rising home prices are bad, and so are falling home prices. As home prices rose through 2006, newspapers across the country ran stories bemoaning the lack of “affordable housing.” Now that prices are falling, newspapers across the country are running stories about the disaster of negative equity, the loss of what used to be a reliable investment and the financial havoc caused by the assumption that home values would keep climbing forever.

– Rising oil prices are bad, and so are falling oil prices. Last summer, with crude oil going for more than $140 a barrel and gasoline over $4 a gallon, politicians were falling all over one another to do something about rising oil prices, which made food and a wide range of other products more expensive. Now oil is around $60 a barrel, but instead of celebrating we’re supposed to worry, because the price reflects fears of a prolonged worldwide recession.

– Consumer spending is bad, except when it’s good. Until recently, economists bemoaned the nation’s low saving rate, warning that Americans were living beyond their means, enjoying a spending spree subsidized by foreign capital. Now the problem is that Americans are spending too little, saving or paying down debt instead of buying stuff they don’t need and thereby stimulating the economy.

Feeling confused, anxious, uncertain? Well, cut it out. That sort of thing is bad for the economy. If you want to shorten the recession, you’d better be confident and optimistic. Just don’t overdo it.

COPYRIGHT 2008 CREATORS SYNDICATE, INC.