Resultsman’s Blog

Steps are Being Taken- Progress is Being Made

Posted in Uncategorized by resultsman on February 1, 2010
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Progress in the nations and global economic recovery is happening, slowly, but the economy is righting itself. One might not believe that real strides are being made in light of the recent correction in the stock markets. The 300 point drop was brought on by a combination of political and economic forces working in tandem.
On the political side, the market’s, continue to be reacting to the restriction that has been placed on a bank’s ability to trade on their own accounts behalf. (Watch what happens to bank sponsored money market accounts- performance of this type of vehicle could change.) What has occurred is a partial reinstating of the Glass Steagall Act which I wrote about last year. Paul Volker, the Reagan era FED chairman who tamed inflation and laid the groundwork for the economic expansion of the 1990’s was a major backer of this move.
To understand this move towards further regulation, one must understand historic context. Through the second half of the 1990’s US banks became less competitive in the global merger and acquisition market place because commercial banking activities were separated from those of M&A banking activities. US banks could not muster the critical mass to put together mega deals. Congress responded with the repeal of the Glass Steagall Act which allowed them to grow and prosper. The unfortunate side consequence of the repeal is that financial institutions grew to a size where they became “too big to fail” without doing major damage to our economy. This is only one of many contributing factors (like lending money to individuals with no ability to repay loans taken) that helped to create conditions that lead to the crisis we find ourselves.
A second political event helped to initiate the correction which we are experiencing. Rumors were circulating that the now serving FED Chairman Ben Vernacke would not be reconfirmed to serve a second term. Yes, the Ben Vernacke who had the foresight to take steps to prevent a complete financial meltdown, throwing the economy into a deep depression. Last week confirmation came, but by that time, investors were spooked and the correction was underway.
Politics had combined with mixed economic results to set the correction in motion. (Corrections are not necessarily bad, they serve a purpose of correcting market price and values.)
So, what is the message behind this posting? Corrections take time to happen. Political pendants are complaining that we have not seen the net benefits of the Economic Stimulus Act that was passed by congress, (and they are correct). So what has happened? Accounting rules require banks to value the assets carried on their balance sheets to market value. By law this is a required event that has not been executed. Banks are being cautious and using the credit and access to cash provided by the stimulus to prop up their balance sheets and methodically cleaning their books up. If banks took the full write downs in the value of the toxic assets on their books, we would have witnessed many more bank failures than we saw in 2009! Fed policy has been loose, more than 1000 banks are being closely monitored, expect more failures in 2010.
In summary, recovery is a slow process that is taking place, just not as fast as a public that is used to instantaneous gratification would like to see. It hurts to say, but time is indeed healing. The right steps are being taken. We have to continue riding out this storm.