Roiling the markets, ignoring history

Does anyone remember what was roiling the markets in 2001? Does the name Enron ring a bell? There were other companies who hid their losses in questionable and illegal accounting practices and the stock markets in that time over reacted to the problems of a few.

I see a similar thing happening in the reaction to the credit problems of some lenders who made bad loans to people who were not able to pay. As the post I made last night suggest, even in areas where the market is strong the media is trying to suggest that there is a problem. I don't think so and whatever the problem is, it is one that will pass and some companies may suffer as well as the investors in those companies, but the fundamentals of most other business enterprises is sound just as they were in 2001.

Opinion Journal makes a similar point in an interview with the Treasury Secretary.

Treasury Secretary Hank Paulson gave an upbeat interview to The Wall Street Journal Wednesday, assuring everyone that the current credit market turmoil will "extract a penalty" but not lead to recession. We tend to agree, but Mr. Paulson would have done better spending his time smoothing over KKR Financial Holdings's commercial paper blowup instead. His words didn't stop another wild market ride yesterday.

The point is that, in a market dominated by fear, what Mr. Paulson says means much less than what he does. The world is undergoing a change in investment quality preference, as they like to say in market circles, which means a flight to such safer assets as cash or Treasuries. That flight has caused a credit seizure for anything tainted with suspect mortgage assets. Losses are inevitable, and to the extent they punish bad decisions even desirable.

But what markets want from the Treasury and the Federal Reserve is evidence that they're skillful financial fielders. That is, that they're able to handle the financial choppers before they get through the infield and create greater trouble. This may not be headline-grabbing, but it's the best way to restore confidence and thus liquidity. The entire point is to avoid surprise headlines.

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What the Journal seems to be saying is that it is time for Daddy to come in and say everything is going to be OK to stop the irrational pessimism that has infected some. At some point, the traders are going to have to take a breath and look at the businesses that have sound fundamentals and reward the stocks of those companies with an investment. That is how you pull out of these kind of high G dives.