I have been working on catching up with the news feeds on Google Reader after a week of barely paying attention to what has been going on. I came across a short blog post by Matthew Yglesias about markets responding positively to talks of the Greek bailout. The point of the post is basically that markets respond with cheers when government intervenes:
…greeted with cheers. That can be TARP, that can be aggressive credit easing by the Fed, that can be the US stimulus or the bigger Chinese stimulus, or now talk of a Greek rescue. It’s never “markets crash in anticipation of future moral hazard problems.”
The funny little thing about this is that how markets react and what people who work the markets say they want to see are completely different. What ever happened to the Rick Santellis of the world speaking out about moral hazard?
Granted, it’s easy, and usually incorrect, to attribute market behavior to singular events when the world is far more complicated than that—especially in the realm of economics. What I find interesting, though, is that markets aren’t reacting negatively because of moral hazard; in truth, shouldn’t the markets have freaked out over each and every bailout? There’s a disconnect between what the markets want and what the markets say they want, much like the disconnect between what the conservative populists want and what they say they want.
Consider the fact the people of the United States say they want government to cut taxes but maintain fiscal responsibility while doing more for job creation. How is that even possible? Sure, ask the Fed to play some tricks and that might make big changes but people want the government to do something about job stagnation. Conservatives say they would be fine with a deficit as long as they get tax cuts. Isn’t the conservative mantra that a balanced budget and getting rid of the deficit is of utmost importance, though? How can that be possible if deficits are the perpetual norm? It seems Democrats are the new the new deficit hawks with 46% wanting “a balanced budget with higher taxes.”
What does that really say, though, and how does this tie into the markets reacting to the Greek bailout? It’s the same thing: what people and markets want and what they say they want are not the same. There’s a whole lot of cognitive dissonance going on and all that intellectual discord might rattle some brains, leaving permanent damage.