Well it turns out this is a misquote of Laurel and Hardy, but it is accurate when applied to government intervention in the financial sector. Christopher Westley has a nice break-down of the problems with the mortgage market.
Fred and I have been discussing these issues with our friend Ed Weick for close to 2 years. Ed is a successful businessman and investor, and a dedicated student of Austrian economics, and he has been quite concerned about the state of the financial sector in the US (and the world). Ed has not always been for nervous, during the 1990s and the dot.com bubble, Ed stressed that resources do not fall into "black-holes", but are reallocated during adjustment processes into more productive directions. The current situation, however, Ed contends is different.
Whenever you seek to lay out an argument for system wide financial catastrophe, I would argue that you need to specify: (a) the trigger, (b) a contagion mechanism, and (c) a reason why the financial catastrophe will not lead to just a readjustment, but instead into a systemic downturn.
My position on the current state of affairs, is that while government policies will continue to result in wild disturbances against a long term growth trend, but the as long as the long terms growth trends are dominated by gains from trade (Smithian growth) and gains from innovation (Schumpeterian growth), then government stupidity will not produce a system wide downturn. In other words, Smithian and Schumpeterian forces will off-set government stupidity.
In addition, I think a lot of the stories about the mortgage mess we are in fail to account for the market innovations that have evolved over the past two decades which diversify risk and manage the downside risk of stupidity in government.
So I believe that a serious market correction is in order, and that reallocation of resources will occur, but I don't see yet the contagion mechanism that will turn the adjustment process into a financial catastrophe for the entire US economy (let alone world economy). Save government nationalization of industry, closing down trading opportunities (domestic and international), and all out militarization, another Great Depression does not seem to be the relevant scenario. Tomorrow will still be better than today, the future our kids will inherit will be one of unimagined material progress and generalized prosperity. But if in the wake of market corrections to financial distortions government policies are instituted which curtail market processes of adjustment that re-price assets and reallocate ownership, and socialize risk rather than "privatize" risk burdens, then the more dire predictions currently offered may prove to be too optimistic. I am still betting that Smithian and Schumpeterian forces are out pacing government Stupidity.