The failure of disclosure - Lesson for Treasury

The number one lesson for Treasury and for the government at this time is that there is a risk premium associated with policy uncertainty. 

The market was not so upset by the fact that there were limited details about the new TARP or Financial Stability Pact (FSP) as much as there is still uncertainty on the form of the policy. Uncertain policies mean the potential for harmful policies. Of course, the policy plan could be market positive but without details it is better to hedge. If there is a delay in policy details it sends the signal that the government is not sure of the course of action and that there is not agreement on what should be done. This means that the political process may results in a poorer outcome. 

Of course announcing a plan does not ensure there is no policy uncertainty. You can easily have an announcement followed with a change in the policy. There is then a loss of credibility. The government cannot be trusted to follow-through on a specific plan.

The policy came is fairly simple, under-promise, over-deliver, mean what you say and follow-through to the best of your ability. You may still be wrong but the market impact may be minimized.