I think we completely agree here – my post was on how Tim’s speech increased uncertainty, both for bank’s and for the rest of the economy, and how that appears to have been a pretty bad move.

I agree that part of the fall in the DOW was the result of bank’s throwing a tanty. However, the main thrust of my post was that recent actions have increased uncertainty – which is a bad thing.

However, this specific problem of uncertainty isn’t going to be solved until the government actual commits to what it is going to do.

I think the Martin Wolf in the FT has got it spot on: http://www.ft.com/cms/s/0/9ebea1b8-f794-11dd-81f7-000077b07658.html

“[The administration] has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? … The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once.”

There’s also a more mundane reason why sharemarkets tanked – the market had been led to believe that the plan would include some or all of: a bad bank, suspension of mark-to-market accounting, and a govt guarantee on interbank lending. I agree that uncertainty is a problem, in that the market will continue to believe that these steps are inevitable, and will put everything on hold until they get them.

All I am saying is that the fact that the rest of the market also doesn’t know what is going on makes things worse – if a firm doesn’t believe that the government is doing anything about fixing their channels of credit, they will continue to hoard cash and cut back investment.

Also I don’t see why it matters if banks want to participate or not – the most extreme scenario is that the government states that they will not intervene, then the bank’s go bankrupt and the credit market is defunct.

If the government is clear with what they are actually doing, and can commit to it, the bank’s will have to work within that framework – currently they still believe that if they hold on, they will get a bailout, leading to the state of flux we are in at the moment.

I imagine that the bank’s are a bit wound up. However, the clarity of the solution has to be part of the issue. If the US government is still exploring the structure of the solution the market is bound to feel uneasy – and is therefore less likely to invest (and also value capital at a lower level).

My concern is that public policy in the US may move so slowly that government action will end up making the situation in the US much worse than it needs to be, or would have been.