So says my GMU Econ colleague Russ Roberts:
When no one knows how the rules of the game are going to change — and they seem to change from week to week — who wants to take a risk? Who wants to borrow money? Who wants to invest? Business and consumers are hunkering down, waiting for the storm of change to pass.
The problem isn't liquidity.
Paulson doesn't realize that his erratic attempts at creating liquidity are creating the uncertainty that makes liquidity meaningless.
Read the whole thing--Russ's analysis seems right on to me.
It is hard to see why anyone would start a business or buy, sell, or refinance a house right now when you have no clue as to what the economic framework is going to be even a week or a month from now. And that is just the day-to-day gyrations of the Bush Administration, ignoring what Congress and President-elect Obama might have up their sleeves in two months. Would you buy a General Motors car right now?
Critics of FDR's interventions during the Great Depression have made the same point--regardless of the merits of FDR's interventions, the constant madcap experimentation and lurching around undermined the stability necessary to pull the country out of the Depression.