John Shadegg on the Self-Fulfilling Prophecy

Further to Rusty's post about the need for the bailout being a self-fulfilling prophecy, here's Rep. John Shadegg echoing the same point:

I have talked to a lot of smart people who know Wall Street, know banking, know the economy quite well, and you hear different opinions. Some will tell you that it is absolutely essential. Quite frankly, Im skeptical about that.

But I think that in some ways the question doesnt matter any more. Because Secretary Paulson chose to raise the matter in the way he did that is, to go public in a very high-profile way, not just with his concern, but with a kind of Chicken-Little, the-sky-is-falling kind of demand it became a self-fulfilling prophecy.

That is to say, once the secretary of the Treasury announces to the world that there is a pending financial collapse, perhaps as great as the Great Depression, and Congress must act he has sent a signal that essentially tells world markets that Congress must act. I will tell you that has been one of the most frustrating things about this since the very beginning...

I cant tell you how many members of Congress were stunned at that news, and were stunned that none of their local bankers were calling them. And then they called their local bankers, as I called my local bankers, and my local bankers said, I think things are just fine. I talked to one banker who said, Gosh, weve got money, and were liquid, and were making a profit. And were in the market selling loans, and weve got competitors trying to sell loans against us.

h/t : Todd at Volokh.

Posted by: Ragnar at 10:48 AM

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