The Four-Paragraph White Flag

As I watched the following section of President Bush's speech tonight, I had that dislocating sensation that we are crossing the threshold into some kind of new epoch. Remember when Bill Clinton declared "the era of big government is over"? This was more like "the era of big confidence in markets is over."

I'm a strong believer in free enterprise. So my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly. There's been a widespread loss of confidence. And major sectors of America's financial system are at risk of shutting down.

The government's top economic experts warn that without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold:

More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.

Fellow citizens: We must not let this happen.

That sound you're hearing is the last free-market politician leaving the building. Come back, Mahatir, all is forgiven!

More seriously, we're in for a fight, people. These will never again soon be "normal circumstances," at least from the perspective of Washington (which is to "circumstances" what a hammer is to a nail). When the allegedly (and at this point, inaccurately termed) free-market party sees bubble-deflation as "the market…not functioning properly," employs exaggerated nightmare scenarios as a justification for nationalizing whole chunks of the finance industry, and considers it a federal priority to keep credit markets as flush with cash as they were when they got into this risky-loan mess in the first place, then we have truly crossed some rubicon.

No matter how many times you'll hear it said over the next several awful days in Washington, this is not a binary choice between Henry Paulson's re-regulatory bailout and Great Depression 2.0. The 1930s will never happen again, thanks to a whole host of innovations and insights over the past seven decades. And even though the current mortgage-backed securities crisis is undeniably beginning to leak out from Wall Street, I'll reserve the kind of panic Bush seems eager to foment until maybe the economy actually stops growing, unemployment actually gets within shouting distance of Reagan-era levels, and the stock market does something scarier than fluctuate a whole lot.

As the participants in our June 2008 roundtable on the economy (including Donald Boudreaux, Ron Paul, and Megan McArdle) repeatedly pointed out, the one thing that may speed and deepen a so-far-nonexistent recession into something worse is the same kind federal overreaction that put the "great" in the Great Depression in the first place. I would have thought we'd all learned our lessons since then, but tonight's speech really hit home that it's no longer safe to take for granted any market literacy whatsoever.