Cyprus Solution – ad hoc Responses with Little Explanation Undermine Market Confidence

What appears to be the final resolution of the crisis in Cyprus may not be perfect but it does not stray that far from the approach advocated here and on The Wall Street Journal’s editorial page last week.

But a good resolution of the Cyprus crisis may not be enough to undo the damage from interventions that are not based on clearly stated diagnoses or predictable frameworks for government actions.

The lesson that policymakers should have learned in 2008 was that massive ad hoc responses with little public explanation undermine market confidence. Such interventions, developed through secret meetings, promote uncertainty and fear. If, as the gentleman once said, the only thing we have to fear is fear itself, this is the perfect recipe for producing that dangerous dish.


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