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Financial System Reforms Needed Now

21 January 2010 15 Comments

tighten-belt-economics

For the second day in a row the U.S. stock market has experienced significant sell-offs, primarily based on worse-than-anticipated economic news. As measured by the Dow Jones Industrial Average, the market lost 122 points on Wednesday, and is headed for another 200 point drop today. Ignoring the impact of unfavorable economic data, many analysts blame the decline on President Obama’s proposed rules that would limit types of trading banks can do with their own money. Investors in financial stocks believe that tighter controls could hurt profits a the big banks, which may, in fact, be true. Those who blame the Obama Administration and proposed regulatory changes for driving stock values down have conveniently forgotten that one year ago the financial services industry in America was on the brink of insolvency. The principal reason for that precarious position was a lack of regulatory oversight on the creation and re-marketing of exotic, derivative investments that created high levels of income, but also carried high levels of risk. As a result of their poor judgment, some of the largest financial institutions in the country were forced to ask the American taxpayers for billions of dollars in loans and subsidies just to stay afloat. Now that time has come to “pay the piper” by enacting regulations to prevent the same disastrous circumstances from happening again, the financial institutions are pouring millions of dollars into lobbying efforts to kill any legislation that would hurt their ability to make profits.

As weary investors know all too well, the stock market is in a “nervous” state of mind. The run-up in stock values over the last nine months has triggered concerns that expectations about an economic recovery are getting too high. The continued high unemployment rate, the weakness in manufacturing, and the tightening-up of Chinese monetary policy have all contributed to a feeling among investors that stock values may be too high. This sell-off, of course, will pass like all others, and the stock market will again continue its slow climb as the economy steadily improves. What will hopefully NOT pass America by is the absolute necessity to regulate the financial services industry’s ability to bring the country to near collapse through irresponsible practices. It is time to remember why the financial services industry almost put America into another Great Depression”, and to support President Obama’s proposed legislation.

—Rich

15 Comments »

Carpetbagger said:

Thus the problem. Bankers see the legislation as limiting their profits. Others see the legislation as limiting how far they will tumble the next time they fall. It’s like a motorcycle helmet. They see the helmet as limiting their fun while riding. We see it as protecting them from falling. They are standing around, nursing their fresh bruises and promising that they couldn’t possibly fall again. Besides, it’s fun to go fast!

I fear Americans are now addicted to double digit stock increases such that anything else is unacceptable. So, we have to feed the monster to get back to those gains.

# 21 January 2010 at 2:42 pm

Harrison said:

Actually forcing banks to loan money to people who had no business borrowing it, then re-selling that debt with other loans that WERE good was a major problem. Chris Dodd (D) is not running again in part for the role he played in that mess.

# 21 January 2010 at 6:13 pm

RE - A BadGalSays said:

Rick I believe the contraction is heavily impacting the minds of those who have the collateral to reinflate the economy. I also believe seeing the changes in the market that we’ve seen the past few days might mean that the lesser lending heavier debt bearing institutions may finally be in collapse.

this will as you know give way to stronger more bear market purchases in the wake of less loss in future quarters. also remember the data we’re seeing now is from three quarters ago and it’s hardly usable to measure todays shifts and peaks.

looking at the fifa made me shudder, and whoo hoo the hang seng ! wow, I think I had to take a deep breath when looking at the tokyo markets.

Please would you care to share your speculation on the reinflation Rich ? I’m personally looking for some good short term advice on debt shifting. not that I’ve got any real capital for investments.

Hey Cherrrr !

# 22 January 2010 at 12:39 am

RE - A BadGalSays said:

Rich do you keep up with the Antwerp Traders Actions ? I read yesterday that the fifa exchange was bustling with so much foreign currency they could hardly get space in the counting rooms. wow.. when is that coming our way ?

do you think investing in construction and healthcare are still good ?
I’m still in with healthcare, but after Haiti – I can feel some rumble in the construction quarters.

What Say You Mr. Rich ?

# 22 January 2010 at 12:43 am

One of The Guys said:

I agree with you Rich.

Although, I’m concerned that last year’s “recovery” was not based on any sound economic principles, but more the stimulus package.

But recovery takes time and I support Obama in everything he’s trying to do. Finally someone trying to fix problems and be responsible, instead of trying to sell the people a bunch of BS on why everything is so rosy.

# 22 January 2010 at 8:09 am

Paul Johnson said:

The economy is very shaky. All the indicators are that great care would be needed to prevent us slipping back into a bad recession again. It is truly a powder keg. For some strange reason, Obama has decided to light the fuse and see what happens.

# 22 January 2010 at 8:59 am

admin (author) said:

Bagger,
After the dire consequences of the Great Depression, Congress wisely enacted legislation to prevent the same thing from happening again. Let’s hope that Congress shows the same degree of wisdom this time around.

# 22 January 2010 at 9:15 am

admin (author) said:

Harrison,
I’m glad to see you recognize that “major problems” in the workings of the financial system were to blame for the near total melt-down experienced last year. Does this mean that you support President Obama’s financial system reforms?

# 22 January 2010 at 9:21 am

admin (author) said:

Re,
I think that investors in the stock market have been “looking” for an excuse to reduce their exposure to the market, and many used President Obama’s proposed regulations as a reason to sell. Truth be told, the market probabaly is a little over-priced, given the underlying economic data. As the economy continues to improve throughout 2010, stock prices will quickly regain what they have lost, and continue their slow climb. I still think that stocks represent the best option for long term financial gain if the investor has staying power, and the guts to stomach the constant ups and downs.

# 22 January 2010 at 9:34 am

admin (author) said:

One of the Guys,
I think the stimulus package had an impact on the economic recovery, although the recovery was primarily due to the economy getting back into a state of “equilibrium”. Unfortunately, the price of a return to equilibrium have been a massive loss of jobs. I also support President Obama in his efforts to bring about positive changes.

# 22 January 2010 at 9:40 am

admin (author) said:

Re,
Over the long run I believe that the U.S. Dollar will weaken against other major currencies. It is only a matter of time before the inflationary pressures caused by trillions of dollars in national debt will hit with a vengeance.
I would avoid investing in “health care-related stocks” at the present time because they have less “up-side” potential than other sectors. I like the idea of investing in companies who manufacture construction-related products, such as cement, because these commodities will continue to be in high demand.

# 22 January 2010 at 9:51 am

admin (author) said:

Paul,
I dis-agree with your “powder-keg” analogy. The American economy seems to be right where it needs to be, given the state of global “supply and demand”. Just what has President Obama done to make you believe he has lit the proverbial fuse? It seems to me that things have recovered as well as could be expected over the last year.

# 22 January 2010 at 9:59 am

ChrisJ said:

Interesting that yesterday Obama used the same metaphor as Carpetbagger – i.e. rules of the road – to talk about reining in the big banks. In his use of it, though, he highlighted how the rules protect us, the consumers.

Also, from glimmers I’ve seen, there seems to be a grassroots movement afoot to make the big banks smaller as customers move their business to smaller banks and credit unions.

# 22 January 2010 at 11:34 am

Paul Johnson said:

Rich,

Yeah Rich…. things are just great! Housing starts are down, unemployment is up this month, China is tightning credit. A new wave of mortgage defaults is anticipated. Corporate earnings are disappointing and nowhere near they need to be to justify the P/E expansion we have seen in the last ten months. Just think how great things will be once the “stimulus” package expires! The Dow is only down about 500 points in the last three days.

And now, to prove he can out “Populist” the new Massachusetts senator, Obama has struck up a new anti-business posture. Sorry but it looks to me like he is putting a match to an economy that is about to go bust.

# 22 January 2010 at 4:26 pm

Harrison said:

When 77% of investors think Obama is not business friendly that’s also going to hurt the economy… after all it is investors that make it go.

# 25 January 2010 at 11:37 pm