Institutions and the Current Situation
During the current financial crisis and
subsequent government actions, the institutions that provide a framework for
our society have been significantly altered. The damage to financial
institutions, which are internal institutions that allow people to allocate
their financial assets and hedge risk, has created a greater degree of
uncertainty in the market. Does this mean the government should step in to
create a less uncertain business environment? Not necessarily. If the
government starts acting erratically, as it has been recently, then the
external institutions which are necessary for society will also begin to fail
at serving their purpose. If the actions of the government lead to a changing
legal order, the level of uncertainty will increase. People will no longer be
able to use the institution of, for example, bankruptcy in order to plan their investments.
The common points of reference around which we can plan will no longer be
useful. Expectations of the future will vary more widely as people attempt to
guess how government will act. Expectations of the "practical range" of
possible government actions will not converge because of the changing legal
order that results from those actions.