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Credit Panic: Stages of Grief
...But Washington's culture is fundamentally different from Wall Street's culture. Politicians of all parties thrive by avoiding responsibility and shifting blame. Congress has not even held hearings yet in the area where it is most clearly responsible: social engineering through banking by pumping mortgages to unqualified borrowers via Fannie Mae, Freddie Mac and laws that required banks to make bad loans. Hearings are promised after the election.

Accepting responsibility for the folly of Fannie and Freddie is crucial. Markets expect even more politicized lending now that the government has direct stakes in banks. Treasury Secretary Henry Paulson offers assurances that banks will operate without political influence, but just last week a group of Democratic senators agitated for lending rules aimed at supporting their social goals.

We've learned that complex modern banking can barely cope with its core function of allocating capital efficiently, much less politically. Denial of this basic point is undermining the beginnings of a return to confidence.

Indeed, a relevant lesson from the Great Depression is that economic recovery was postponed for years by what economist Robert Higgs calls the "regime of uncertainty." Mr. Higgs traces the uncertainties caused by extreme government economic intervention in the 1930s through laws, regulations and confiscatory tax rates. He writes in The Independent Review that "businesspeople may be more or less 'uncertain about the regime,' by which I mean, distressed that investors' private property rights in their capital and the income it yields will be attenuated further by government action."

Or, as Amity Shlaes, author of the best seller on the causes of the Great Depression, "The Forgotten Man," puts it, our current economy is in a "recession of uncertainty." Until Washington accepts responsibility for its role in politicizing banking over the past several years, markets will not be confident about the rules of the road....