Loose Lips Sink Banks and Economy

Senate Banking Committee Chairman Christopher Dodd on Friday said banks may have to be nationalized for a short time. Dodd’s careless remarks about bank nationalization followed a similar remark made a few days earlier by Senator Lindsey Graham, who said nationalization is an option for dealing with troubled U.S. banks if they fail the U.S. Treasury's stress test. Dodd’s remark sent stock prices, especially bank shares, into a midday free fall, caused sharp price rises in U.S. Treasury securities and gold, and led to a significant fall in the dollar on foreign exchange markets.

Loose lipped comments by Senators can have disastrous consequences. For example, Senator Charles Schumer’s remark a few months ago regarding IndyMac is widely regarded as having contributed to a run on that thrift and its closing. Similarly, Senator Harry Reid’s comment that a major insurance company was about to fail contributed to the collapse of insurance company stocks.

Amazingly, Senator Dodd appeared surprised that his remarks had such a devastating impact on the markets. His amazement testifies to the fact that he, as well as Senators Graham, Schumer, and Reid, have lost touch with the dire situation facing this nation. In particular, they have shown a failure to fully appreciate the increasing nervousness and concern of consumers and investors.

The nation is on the precipice of a true economic collapse. People are walking a fine line between hope and despair.

Given the fragile state of consumer psychology, Senators and other leaders need to be aware that lame brained remarks could easily push us off the cliff. They need to avoid fanning the flames.