Some who read my earlier article will doubtless ask "Well, do you now admit you were overly optimistic before? That the crisis really was as bad as the media said, and that you underestimated the problems?"

To which I can honestly say no. In fact, I think even now we are overestimating the crisis.

First, because of the hype, we are certainly undervaluing not just subprime mortgages but all mortgage instruments. As a result mortgages are becoming very hard to sell on the open market. Thus, companies which purchased these bundled mortgages with the expectation that a strong market would make them easy to sell if the need arose find they cannot unload their bundled mortgages and are facing a liquidity crisis. This can be a serious problem for the companies involved, that is sure, but it is also a problem largely rooted in perception, not reality, as the reason the mortgage bundles are no longer negotiable is simple panic over them. (And also government involvement, see my next point.)

A second reason there is probably exaggeration of the crisis is the possibility of government involvement. For example, the big three auto makers. They are now applying for a bailout. Why? Did they hold a huge number of subprime mortgages? No, they are in the same financial straits they have been for some time due to overly demanding union contracts and a weak market during hard times. Though the market is slowing, and prices are dropping, union escalator clauses work in only one way, and the auto makers are suffering for it. But that has nothing to do with the current subprime problems. Yet they are trying to cash in on the general bailout frenzy.

And that is why so many companies are crying poor. Let's face it, the government is going to be throwing money around, so why would you want to present a realistic picture of your net worth? Why not say you are on the brink of bankruptcy if it might get you a couple billion in free money? Granted, there are companies hurting, especially in the financial sector, but I have a feeling there are even more playing up the weakness of their position in hopes of grabbing a slice of the $700 billion, in the same way the automakers came, hat in hand, to DC for a little government charity.

This is also causing a lot of the inactivity in the mortgage market. Back when the bailout was first proposed, and it was thought the government would be buying up mortgages directly, mortgages became a hot commodity again for a short time. Now that it seems the government is going to deal directly with the banks, simply providing handouts in exchange for equity, the mortgages themselves have become worthless again and many are facing liquidity crunches thanks to this. As the bailout appears to be less and less tied to holding of mortgages, and as the general panic mindset has made mortgages almost impossible to trade, they have simply dropped to a value close to zero, despite the fact that many continue to perform and have some real value.

Actually, there is one other possible reason mortgages are becoming even less desirable to hold. As the government continues to talk of "helping borrowers" it is quite possible laws will soon arise to immunize buyers against any ill effects of default on subprime mortgages. If the mortgages no longer allow repossession and government removes most ability to collect, mortgages, at least subprime mortgages may become truly valueless, and that fear is certainly making them ever less desirable to hold.

Another factor in this whole affair is the huge involvement of the general public in the stock market in the past decade and a half. Where the market was largely the province of institutional investors, professionals and the wealthy before the late 80's, it has now become the province of the middle class, and, thanks to online brokers, the average investor can quickly get quotes and trade. And as a result, with every bit of bad news, small investors have dropped out of the market in a panic, farther depressing the market, feeding into new market drop outs. Several times this has been arrested when institutional investors have judged the market to be exceptionally undervalued and tried to pick up bargain stocks, but following every such brief rally, the panic selling has started over, spurred on by yet more hype about the problems in the economy. And so the market continues to drop dramatically, not just in the sectors one would expect, but across the boards as small investors fail to distinguish between weak segments of the economy and strong ones. To them, the market itself is dangerous and they are simply dumping everything.

And all of these factors feed into one another. When consumers are fearful they spend less. When spending drops, companies forgo planned expansions, especially when liquidity crises make borrowed money unduly expensive. With a drop in expansion, other companies see their sales drop as well. And so the general panic causes something of a self-reinforcing cycle, all driven along by the continual negative news the media has been feeding us, well since January 2001, but more loudly ever since the housing bubble burst near the beginning of this year.

However, as Dr. Sowell said, and as McCain once said,t he underlying economy does still remain strong. Were the government to step out of the picture, allow the holders of subprime mortgages to try to collect, even foreclose, and then let them handle the remaining losses as best they can, it would hurt. The markets would definitely be in a bit of a shambles as the bad investment in subprime mortgages worked their way out of the financial markets, but ti would pass. It would probably be no worse than the collapse of Enron. We would see a slump, a few quarters of slow growth, maybe one negative, likely not even that.

Instead, the state plans to hop in with both feet and start throwing around money. As they aren't going to cut spending or raise taxes, that means nothing but new inflation, creating artificially low interest rates, leading to more bad loans being pushed into the flow of commerce. And, of course, they will do foolish things like "protecting borrowers" which, as I said above, will probably do even more harm than an outright purchase of the loans would.  Not to mention the even more intrusive measures once these initial attempts fail.

And that is the real danger. Our current situation is not bad. As Dr. Sowell wrote, we are economically pretty sound. Unemployment is still low, it is likely after later adjustments we still have not seen a quarter of negative growth, we have no reason to panic. But panicking we are, and in that panic we are likely to endorse ever more invasive government measures. And those measures WILL hurt our economy.

Better we face the music now, take our lumps and get past the bad decisions of the past. But, if the past is any teacher, we are unwilling to ever face the consequences of what we did, so we will inflate once again, try to use newly minted money to buy our way out of trouble, and set ourselves up for an even greater crash farther down the road.