Rich,

You’ll get no disagreement from me that it’s very, very difficult to draw quick conclusions about the relationship between public policy and financial markets. Investors are all about trying to predict the future, not judge the past. You can draw inferences and calculate probabilities — for example, is fear of Obama’s economic policies really likely to be a major cause of worldwide sell-offs? — but assigning any particular market move to any particular political pronouncement or action is often fraught with peril.

That said, though, think back to when the House initially voted down the Paulson plan. There was a large subsequent drop in equity values, which many pundits, including some Corner contributors, blamed on the irresponsibility of House Republicans. Now that the plan, more or less intact, has been voted into law, the markets have truly plummeted. Sure, it’s possible that the bear market would have been even hairier and growlier if the Paulson’s bailout notion had never passed, but a certain Medieval philosopher’s shaving equipment would tend to discourage that line of reasoning.

Your correspondent is correct, I think. This is an Austrian moment being described almost entirely in Keynesian terms. No wonder people are panicked and confused.

I think the case against Treasury’s plan remains persuasive. Forcing taxpayers to buy assets at prices above what investors would voluntarily shell out for them — which is the most clearcut definition of the plan — transfers scarce resources from people who made better decisions to people who made worse decisions. It doesn’t solve the capitalization problem, and proposing such a massive new federal power over the economy is likely to — and probably has already worked to — spook investors far more about current conditions and the future market environment than whatever confidence Treasury expected to build. Indeed, more generally the series of bailouts can themselves be seen as repeated signals to international investors that policymakers are panicked and desperate. Would you want to invest in such a place?

For all the talk about market psychology, there seems to be little appreciation of the fact that when public officials say reassuring things but do death-defying things, investors learn to ignore what is said and treat every new “remedy” as additional tests confirming a terminal diagnosis. That’s why central bankers can slash interest rates in concert and then see investors get more jittery.

I remain convinced that the best response to the initial panic was to propose policies, such as changes in accounting regulation and tax relief, that we wouldn’t have come to regret and that signaled clearly to worldwide investors that America would be a more attractive place to earn returns in the future. If intervention in the mortgage markets was warranted, something to reduce the severity of the underyling problem — risk of mortgage defaults, not housing prices per se — would have been preferable, essentially a temporary bailout of homeowners via tax credit or a renegotiation program on steriods. And if intervention in the banking system was warranted, working through existing institutions such as FDIC and the Fed was preferable to creating a new entity at Treasury with unclear intentions and clear long-term risks.

At the very least, however, can we agree now that it was a mistake to blast House Republicans for yanking the Dow down a few hundred points? That was a couple of “market floors” ago.