Wednesday, March 23, 2011

The 2008 Financial Crisis? What Financial Crisis?

Americans—and Americans who invest, in particular—have short memories.  They forgot which investment strategists and  economists (and policy makers) drove them off the cliff in the technology-stock bubble a decade ago.  Many of those same actors were back it only half a decade later.  They claimed that nationwide house prices never decline, that derivatives were marvelous for diversifying risk, and that government regulation impeded the operation of the miraculous free market.  I wish more people would watch the movie “Inside Job.”  It MIGHT alter thinking enough so that people would no longer tolerate the crony capitalism that so badly damaged our country.

A Bloomberg news story today noted that the recent Japanese earthquake was on a different fault line than the major one that runs under Tokyo and as a result, some geologists worry that the quake put more stress on the Tokyo fault, making it just a matter of time before The Big One hits Tokyo.  Similarly, I worry that the 2008 global financial crisis didn’t remove stresses in the global financial system and that it remains precarious. 

The financial reform regulation in the U.S. was so watered down that the proposals of Paul Volcker--a true public servant and the epitome of a prudent central banker—were effectively dismissed.  As with a different Japanese crisis two decades ago—the peak of their market bubble—the response by those in charge here seems to try to buy time to muddle through and avoid recognizing the huge losses in the system.   In the meantime, there is money to be made, so why waste the chance?

The President of the Dallas Federal Reserve Bank, Richard Fisher, is the closest thing to a financial conscience this country has had since Mr. Volcker.  Mr. Fisher warned yesterday of “extraordinary speculative activity” in the U.S.  Citing a surge of “covenant-lite” loans (loose lending practices) and a return of private-equity payouts (huge payouts from financial engineering), he noted that “there is an enormous amount of liquidity sloshing around.”  That liquidity is the result of the policies of Ben Bernanke, he of the actors who drove the financial system to the brink. 

This environment might lead to profitable trading opportunities for the fast-money crowd, but the U.S. financial system remains dominated by a handful of firms that are “too big to fail.”  It continues to be a system in which profits are for private, well-connected interests and losses are for the taxpaying public.

Ask yourself whether your portfolio can again withstand something similar to what happened in 2008.  If not, this is an ideal time  to make needed adjustments.

Steve Lehman

S & P 500:  1295
Russell 2000:  809

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