Bank Deregulation and the Credit Crunch

The verdict is in, and the consensus on Wall Street is that the Fed is going to ease rates again on December 11, perhaps as much as .5%. Today Steve Liesman, CNBC analyst, argued with some other commentators who felt the banks should be forced to pay a bigger price for their errors, by noting that "this isn't Walmart going down, this is the banking system for God's sake!" On reflection he is probably right--we can't afford to let the banks suffer too much, because when they suffer, we all suffer.

What bothers me about this situation is the fact that nobody seems to want to recognize that what is happening in the banking industry is a natural outgrowth of banking deregulation which occurred in 1999 (one commentator has-http://www.henryckliu.com/page140.html). The Financial Services Modernization Act of 1999 brought down the firewall between commercial banking and investment banking which was put in place after the depression. Before 1999, banks were very conservative institutions. After 1999, they were suddenly allowed to take on a lot more risk and leverage. The banks' failure to effectively manage the risk of investment in mortgage-based derivatives is at the heart of the current crisis.

Now don't get me wrong--I'm not convinced all aspects of financial modernization are bad--in many ways the modernization of this industry has helped fuel worldwide economic growth over the last ten years.

But it seems like we've created a monster--a banking system which is allowed to compete on a laissez-faire basis in the the capital markets, but unlike other market based entities (i.e. Walmart), when it makes a mistake, the Fed will bail it out.

It doesn't sound much like Capitalism to me--it sounds crazy! If the Fed bails out the banks, then the next CEO of Citibank or Merrill will be advised to take on even more risk--after all, great risk can lead to great rewards, and if the gamble fails to pay off, the American consumer can be expected to pay the price through inflation (note the price of oil) as the dollar loses value due to the Fed action.

What can we do? Is it time for Congress to revisit banking regulations to prevent this kind of event from happening again.

End of the Road

As this course comes to an end, I'm glad to know that students are generally succeeding in geeting to the 26-39 blog entries I asked for.

I also thought I'd reflect again on the importance of blogging in today's corporations.

Intel has a number of corporate blogs, with one related directly to research (http://blogs.intel.com/research/). Many other companies use blogs for research purposes, marketing purposes, and for project communication. Blogging is an activity that business writers need to be able to do--its a genre you need to be familiar with. That was the purpose of this assignment.

New Project Ideas

For a while I've been thinking of a new writing project scenario for W331 reports.

Here's an idea.

You are a member of the Federal Open Markets Committee (FOMC) chaired by Fed Reserve chairman Ben Bernanke.

The FOMC has a quarterly report on the economy which it releases to the public. In this report, the opinions of all the board members are graphed, aggregated and summarized. (See http://www.federalreserve.gov/newsevents/press/monetary/20071114a.htm)

Using a shortened format from this report, and publically available economic data, submit your "individual" version of such a report. You should include a summary explaining your position, graphs predicting the status of the following economic variables over the next four years, and text explaining those predictions. Based upon this data, you should also summarize, and make a recommendation for interest rates controlled by the FOMC.

Economic Data: Real PCE Inflation, Core PCE Inflation, Real GDP growth, unemployment rate,

SIFs, SIVs, and the market, Oh My!

Yesterday the Down Jones Industrial average fell over 200 points by midday due to comments by Fed Charman Bernanke that the credit crisis was much larger, and likely would take the better part of next year to unwind. The problem is that companies packaged mortgages into a kind of investment bond, called SIVs, or Structured Investment Vehicles. Unfortunately, the SEC hasn't required companies to account for the value or liabilities to these SIVs on their balance sheets. Until mortgages actually go into fault, and real estate is sold to recoup some of the loan, the actual value of these investments is difficult to determine. These SIVs are a problem.

The market recovered very quickly at the end of the day yesterday--good news, right! Maybe not. CNBC commentators noted that the market may have recovered because SIFS, or Sovereign Investment Funds, were targeting assets of American companies because they were currently cheap. What is a Sovereign Investment Fund? It's an investment fund created by a nation to invest in the assets of other nations. China has one, so does Saudi Arabia. In other words, as we but Chinese goods and Saudi oil, these funds build up dollars, which can be later used to purchase real assets. While we have had a negative balance of trade with these companies for years, it's only been recently that the government had been concerned that these funds have become so big they could cause "mischief" with our economy. I don't know about you, but mischief at the level of nation states worries me! We won the Cold War because the Soviet economy collapsed--I would hate to see America become a third world nation because of an economic collapse orchestrated by nation states who own our economy.

At any rate, the Bush administration has become worried enough to ask the International Monetary Fund (IMF) to consider setting standards of conduct for the operations of such funds.

Recession?

Ben Bernanke is finally warning us that the housing recession is likely to spread throughout the economy (http://www.msnbc.msn.com/id/21688234/).

And while he isn't using the "R" word, every other housing recession has let to a wider economic recession. Yet, with GDP growth over 3% in the third quarter, we have a lot of slowing in front of us--how sharp and fast will this downturn accelerate?

It makes me nervous!

Revising

As your team works writing the front matter of your report, and revising the body, I'm at work revising the article I wrote about management and writing in the naval nuclear reactors program. The reviewers liked the article, but wanted some revision. They wanted to see more of a theoretical connection between my observations and other scholarship in the field. And they wanted to see a more critical approach--at times they felt the article painted a picture of the organization as a utopia, which it certainly isn't.

So I'm back to work on the project, reading and revising!