Markets recognize desperation when they see it. That's the best analysis of shareholders' reaction to the $700 billion rescue law.
Ripping open the package Treasury Secretary Henry Paulson offered, investors sought reform. Instead they found short-term gimmicks, cash and earmarks. The grab bag means trouble, unaddressed, is still down the road. The markets' conclusion: Might as well get it over with by selling now.
The sell-now attitude may be coming out of the experience of the nation's last great banking crisis, that of the savings and loans. That crisis started in the late 1970s and early 1980s, when interest rates skyrocketed; in 1981 the prime rate passed 21 percent. The thrifts were lending at low rates and had to borrow at high rates. They quickly were rendered insolvent.
Overregulation played a role: the government put a 5.5 percent ceiling on passbook savings accounts. Meanwhile, smart kids were earning much higher rates in money-market mutual funds. Real estate and a bust, then as now, played a role.
At first, policy makers thought they could solve thrifts' challenges merely by allowing them to lend at higher rates. As author Martin Lowy paraphrases in his chronicle of the thrifts' misadventures, "High Rollers,'' the Treasury viewed the trouble thusly: "The problem is basically a liquidity problem caused by interest-rate regulation. If rates are deregulated, the S&Ls will be able to attract funds.'' The emphasis on liquidity, as opposed to solvency, sounds almost Paulson-esque.