Why do we have to please the markets?

Paul Krugman picks up on one of my frustrations:

Gah. I hate, hate, hate it when people say that we have to do something, not on its merits, but because otherwise we would damage market confidence. Nobody really knows how the markets will react; the right thing, always, is to pursue policies that look right on the substance.

I agree with Paul. This line of reasoning grates on me as well, like someone dragging rusty nails over a chalkboard. When I worked at the Federal Reserve and the Treasury Department, and while in graduate school, I heard this line of reasoning all the time. It always dove me crazy and I have blown up twice.

Once it was at the IMF. I was in a meeting about how to deal with Ukraine’s exploding deficit and one of my colleagues said it was important to pursue pension reform because that would reassure the markets. I went a little crazy. It was the middle of winter and people were freezing in Ukraine. I think I shouted something like “Who are these markets? Why do we have to please them? Old people in Kiev are freezing and you want to give them less money for their heating bills so we can please the markets. What kind of sense does that make?” Everyone looked at me like I was a little nuts.

The second time happened in graduate school. One of my classmates was obsessed with this type of logic as well: any policy that made markets happy was by definition a good one, according to him. He was making a presentation on his research and he must have said investor confidence one too many times for me to swallow. I blurted out something like “So what I am hearing from you is that it’s better to wreck the lives of the people you govern than provide useful public services, if that’s what the markets want. As long as we’re at it, why don’t we get rid of democracy altogether and let markets choose our government?”

The comments to Krugman’s post have been equally as humorous and cathartic.  Here is a selection:

People who claim markets are rational would appear slightly more credible if they didn’t in the same breath advocate treating the markets as one would treat a very grouchy, very rabid dog.

“The Market” is not some ancient god to whom we must sacrifice our judgment or fear their wrath and ill omens. Nor is it like a child we must shelter from the harsh realities of the world lest we hurt its feelings.

Amen. Let’s not upset those market confidence spirits.

There is almost an element of blackmail in these utterances as if you say something a little negative and the markets will tank and you are to blame for all the dwindling 401Ks.

One suspects that the “markets” might be very unhappy if Congress enacted good regulatory controls, or unemployment payments were extended to those not presently covered, or taxes imposed on excessive bonuses. But that doesn’t mean they shouldn’t be done.

What about the slave markets? We don’t want to disrupt those either??? It’s not because one sells something that it is a good thing.

Thank you, Paul. I am glad to know I am not alone.