Amanda Ripley

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Shhh! How (Not) to Avoid a Financial Panic

26th Sep 2008 posted in General

Listening to US officials warn of a fiscal crisis, I am struck by how much they sound like officials on the brink of a disaster or a terrorist attack. In both cases, the official instinct is to say less rather than more. This is a mistake.

We hear vague warnings of impending doom—but no details. We are expected to follow orders—and support a $700 billion bail-out package—without knowing what will happen if we don’t. And now the proposed bail-out plan is vague, too.

No one can predict the future. But it is obvious that Treasury Secretary Henry Paulson and President Bush are being vague partly because they are worried about a financial panic. So they are being intentionally mysterious with the public (but not with Congress) about what might happen if we don’t do what they say. This is a legitimate fear. The stock market rises and falls on emotion more than facts.

But we know from a long history of physical disasters that the overly vague approach can be self-fulfilling. Mysterious threats communicate many messages. One message is that officials do not trust the public; sensing this, the public in turn tends not to trust officials. The whole conversation becomes steeped in suspicion.

After all, these are the same characters who downplayed fears about a deep recession earlier this year. So if they are going to ask for the public’s trust, they are going to have to be more specific. This is a difficult and delicate balancing act, it is true. But this administration does not have enough credibility in the bank to err on the side of secrecy.