The Fed, the Treasury and the SEC appear to be in a state of panic. A crisis mentality led the custodians of the U.S. capital markets publicly to jettison their lifelong commitments to the capital markets in favor of a series of short-term regulatory quick fixes. Even more troubling, for the past several months the doyens of U.S. fiscal and monetary policy have ignored the most fundamental principle of central banking, which is that the primary responsibility of central bankers is to promote stability and to maintain confidence in the capital markets. Our central bankers appear to have suddenly lost confidence both in their own abilities and in the standard tools of fiscal and monetary policy. ~Jonathan Macey

I agree entirely, and I have been saying much the same thing for the last three weeks:

The role the government and bailout supporters have played in exacerbating the real problems in credit markets and sapping market confidence with apocalyptic warnings will, I suspect, go down as one of the most dangerous episodes of hysterical overreaction in recent history.

A bit earlier, I had said:

I wonder why confidence might wane when all of the people who claim to know the most about what’s going on are declaring that the end is nigh.  Bailout supporters are doing their best to instill unreasoning fear in the minds of the public and their representatives to stampede them in the direction of taking action, but I would bet that this political panic is contributing directly to the general loss of confidence.  As the loss of confidence spreads because of alarmism, I can imagine that the political panic could lead to a worse financial panic than might otherwise be the case.

It is difficult to understand the mad sell-off of the last week except as a general panic stoked by those in positions of authority.  Many will point to the credit markets, but even here the tightening of credit has been at least partly a response to government promises of intervention.  Macey does not limit his criticisms to the actions of the last few months, but includes the mistakes of the Fed, Treasury and SEC dating back to the start of the year and earlier.  It is worth reading Macey’s entire article to understand how rushing on several occasions to do something in very ad hoc, arbitrary ways, which was supposed to be imperative for restoring confidence, has been undermining confidence by sending clear signals that the authorities believe the markets to be broken. 

Macey concludes:

Most of all, if the markets are to get back on track our regulators must put an immediate stop to their current practice of publicly demonizing the markets and work to restore confidence in the system.