The global capital markets have provided an interesting and even scary ride this past week. Market upheavals are never fun, nor are they sought for events. Even so, given the nature of man, market upheavals are necessary events in our domestic and global societies. Market corrections are necessary because we tend to push the envelope and reach beyond reasoned bounds. To many this week has been revelatory and has exposed the excesses in our capital market society. Some have said that this past week was like unto the depression of 1929, really? Yes, we have been here before, and we will be here again - such is the nature of markets. You only get hurt on a roller coaster if you jump off. As scary as the ride may be, we usually arrive safely where we began. The rule in market corrections is not to jump off and endure the ride.
In spite of these corrections, our markets and economies are fundamentally strong. Foundationally, they are built on correct free market and economic principles, proven and tested over time. Notwithstanding, the US Treasury can meet its measure by needed intercession to restore market confidence if the corrections are perceived as potentially irreparable. In its bailout of AIG, the Treasury acted appropriately. The shareholders and management of AIG will bear the consequence of their folly, but given the security and equity interests taken, liquidity restored and markets stabilized the Treasury (US taxpayers) will benefit handsomely when AIG is repatriated in the free market.
I can recall in the mid 70's when mortgage rates were at 15%, overnight bank rates exceeded 20%, the 20 year Treasury Note hit 9%, the DJIA was around 600, the government stepped in an bailed out Chrysler with $1.2 billion in loan guaranties, and many thought we were doomed. Many thought the Chrysler bailout was a failed policy in spite of the nearly $500 million in profit to the Treasury in later years. The policy wasn't a failed policy as it restored confidence in the markets. The failed policy was the auto industry's unwillingness to change its much needed business strategy, thinking it could continue business as usual. Again in the 1980's we faced the S&L crisis which cost the nation dearly. The government bail out the S&L industry, again, was critical in restoring market confidence. Even so, what did we learn? Very little. The unfortunate consequence of past corrections is always reflected in future events. Corrections reset the bar but have done little to change the underpinning nature of the players. Hopefully, this correction will cause us to learn from our errant behaviors, although unlikely. An interesting article in the NY Times.
Secretary Paulson and Chairman Bernanke, and their staffs at the Treasury and Fed, have served us well in this correction and confidence is on course to restoration. Unlike the protestations of Senator Obama this correction doesn't rest at the feet of George Bush. It rests at the doorstep of our investment banks, insurers and commercial banks. Further, John McCain's inappropriate call for the head of Christopher Cox reflects our societies wont for a scapegoat. Without doubt, the management of Freddie Mac, Fannie Mae, Bear Stearns and Lehman have been caught in their own trap, and we have had to endure the ride. In spite of it all, the system works. If any regulation is sought, is should be principle based and set the bar of consequence upon those who are responsible before we get beyond the breach. Let us be measured and not throw the baby out with the bath water. We needn't over regulate, but establish capital adequacy ratios and define assets and liabilities in a manner so as to assure our financial institutions (investment banks, insurers and commercial banks) are secure and competitive in the global market.
Having spent the past 30 years in the capital markets, and knowing the intracies and complexities of the markets that reach into every global sphere, whether through the derivative, debt or equity markets; of one thing I am certain, politicians are the last of any breed to try and regulate or oversee the fundamental economies of the world. Senators Obama and McCain, and their respective running mates, are not sufficiently resourced to respond, nor are most who lead our nation, whether in Congress or the White House. It is in their advisors, Secretaries of the Cabinet, Fed Chairman and other informed experts who are charged with a public trust that we can turn to for guidance in these matters, drawing further from the capital market industry. Let us hope for reason and capacity, and not political profferings as we weather these economic storms.
Surely, we will see future corrections, and most likely more often. Therefore, it is incumbent upon all Americans to be measured, reasoned and conservative in their financial houses - not reaching beyond our capacities and setting our storehouses in order to better enable our enduring of the storms ahead. We must limit our personal debts, set aside capital reserves, improve the depth of our food stores and live with prudence and within our means.
If only the American people could have seen and accepted the much needed capacity of Mitt Romney. Of any who have sought the office of POTUS, he understands the economic markets we face, and if we have any issue in this election, it is the economy, stupid!