The problem of confidence

The survival of the world financial system depends on an elaborate confidence game. The size of the financial markets, relative to the governments, has become so monstrously huge there is no other means of maintaining stability than to establish a psychology of confidence. The governments themselves cannot by edict restore order. They can only project to the markets a sense that they know what they're doing."

David Smick

Trust, confidence, order. These words are easy to define but are hard to quantify during a crisis. We need all three, yet all are in short supply. The rules of the game are changing everyday which destroy trust that the system is fair and well-known. If the system of rules are not known then there is no reason to play the game of investing anywhere around thee world. What is critically needed is a set of principals that are well defined by governments to explain what it will do and when it will do it.

The TARP may be a good plan but the lack of clarity or guiding principals that can be understood by everyone is not one of the pieces. The case-by-case approach to solving the problem is not working and needs to be revamped. This is not a monetary problem that can be tackled or articulated by the central banks but a rules problem which will tell investor will be saved and what will be allowed to fail. Of course, precise answers cannot always be provided, but clarity of principals is required.