Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Risk of Less Risk; The "Yeah, But" Syndrome

Politics / Credit Crisis Bailouts Oct 01, 2009 - 03:13 PM GMT

By: Paul_Petillo

Politics

Best Financial Markets Analysis ArticleAs Ben Bernanke, the Federal Reserve Chairman testifies before Congress, we will come to the conclusion that there is risk, we should do something about it and we still have no idea exactly what. Referring to the problem as systemic risk, both in the creation of firms seeking to reach, through acquisition, the "to-big-to-fail" status and the inability of one agency to oversee every player in this complicated, global game of finance, Bernanke admits that we are far from where we need to be but much closer than we think.


There is absolutely no doubt in anyone's mind, this is bigger than one agency. Even the ability to provide oversight to this sort of mechanism creates a risk in itself. The Fed will admit it has learned a great deal.

Top of those now known facts is that numerous other participants in the financial world, those whose regulation falls under the purview of other agencies/regulators who, because it was not previously needed, failed to look at the leverage and risk some of their charges were assuming. Insurance firms and lending institutions that fell outside of what the Fed was trying to watch, slipped through the regulatory cracks. It is now known that these firms provided just as much in terms of financial disruptions as did the banking system.

President Obama has suggested that the central bank be the primary torch bearer in this effort to provide stability. The ability to understand the complexities of this type of problem should fall to those who can make the best decision. But the question of how quickly the Fed can react, outside of increased regulation and policing of the regulatory follow-through, has never been an attribute of this agency.

While the world has never experienced this kind of downturn, one where risk was sold as predictable and eventually collapsed under its own promises, the aftermath of such activity does justify the need for some reaction.

So how does Mr. Bernanke describe the harness he has determined is needed: consolidated supervision. This allows the Fed to take the lead and offer some much needed protections.

Many of the decisions the Fed makes are reactive. The Fed has proven in numerous circumstances that its decisions take weeks, often months to find their way into the system. This time-lag can be costly in a marketplace that responds to news now. It also relies on the predictive powers of the central bank, the ability of these bankers to spot the problem long before it becomes a problem and to move without causing a panic. Not exactly in the Fed's wheelhouse.

I'm not seeing how this could be done to the benefit of everyone concerned. Mr. Bernanke shows his concern as well: "Unfortunately, the current regulatory and supervisory framework for systemically important payment, clearing, and settlement arrangements is fragmented, creating the potential for inconsistent standards to be adopted or applied." Consumers will ultimately find this sort adoption of rules to be expensive.

As banks begin to anticipate the future of what these agencies adopt, pass down costs will further restrict any recovery in the short-term. The stock market, suffering from "yeah, but" syndrome, an affliction that allows you to second guess every piece of good news and discount every piece of bad, will not be phased. The markets will instead see this much the way they see the continued unemployment, limited growth because of it, and tighter lending requirements: a bump in the road.

But will any of these proposals eliminate systemic risks? Risk comes from uncertainty and the Fed is too smart to try and wipe away this sort of activity. Investors have to believe, if wrongly so, that the markets offer enough risk to warrant their participation. "Yeah, but" not too much that they get blindsided by something they could not possibly have anticipated.

We tend to think of investors on a personal level, believing that our participation in these risky endeavors is acceptable, even encouraged. Even after all we have been through, we still want to believe that somewhere, someone is watching over us. It is the comfort of this regulation, humming in the background that let us down and now, retooled, it is supposed to revitalize that trust.

So how does this play out in the long-term? Probably better than we might anticipate. Most businesses have become as lean as they possibly can. Their ability to borrow still remains more costly than it should and new leverage and capitalization requirements by both borrowers and lenders will make the process of regrowing the economy slower. Which is probably a good thing.

We have gotten swept up in the speed of business without allowing us the opportunity to examine motives and risks. The slightly slower pace that another regulatory door will provide should make the long-term health of the marketplace more welcoming. Money is returning to markets because it has no place else to go. To create a healthy investment environment, this has to stop. Money has to want to be invested, not forced.

The risk of less risk is threefold: a slower moving system, a more expensive system, and lesser short-term rewards for participation. The glory days are behind us and had anyone been able to see the future, they most assuredly would have suggested "yeah, but". But in the long-term, we could experience less severe downturns, more or better prolonged gains and a healthier retiree (at least from a financial standpoint).

The "yeah, but" syndrome will carry us forward for quite some time. But as all long-term investors know, we will soon forget. Let's hope those in the position to be the regulators don't.

By Paul Petillo
Managing Editor
http://bluecollardollar.com

Paul Petillo is the Managing Editor of the http://bluecollardollar.com and the author of several books on personal finance including "Building Wealth in a Paycheck-to-Paycheck World" (McGraw-Hill 2004) and "Investing for the Utterly Confused (McGraw-Hill 2007). He can be reached for comment via: editor@bluecollardollar.com

Paul Petillo Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in