The Devil we know (3/31/2008)
There has been a great deal of criticism aimed at the Federal Reserve and the chairman, Ben Bernanke, in the last few weeks. Some question whether the Fed is taking into account the moral hazard risks they create by bailing out Bear Stearns. Of course they are. The Fed is fully aware that there will be significant effort required to convince markets later that they will not always be there the bail firms out. That is the devil we know.
Before you decry the Fed's action answer the following question: Had the Fed allowed Bear Stearns to fail, what would the result have been? How sure are you of that answer?
This is the devil we don't know.
The resulting fallout could have been catastrophic. Bear was a counterparty to some $10 trillion in derivatives. The market frenzy would have been pure chaos. Markets likely would have not opened for several days in an effort to stem panic and prevent it from becoming systemic failure on a global scale. |
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Now Treasury Secretary Paulson is suggesting this decades "sweeping regulatory reform" for banking. Critics are mounting on both sides of the political spectrum. Hopefully some contrcutive soultions will arise.
This may be a fool's hope if the recent comments of Senator Christopher Dodd (D-Conn.), Chairman of the Senate Banking Committee are any indicator. The Senator suggested the proposed reforms will not help the current situation in financial markets.
Clearly the current situation will not be resolved by regulatory reforms not yet passed, and which are unlikely to pass until next year.
Aside from the timing issue there is a bigger issue to confront. The current reforms will at best prevent a crisis like our current one from happening again. At worst they will focus valuable time and energy on a past crisis so that we will be taken by surprise when the next crisis occurs. The looming question then becomes who will be in need of a bailout then. |
BBER releases Winter 2008 QFR (3/17/2008)
BBER is pleased to announce the release of the Winter 2008 edition of its Quarterly Forecast Report providing forecasts for the US, state of North Dakota and the region. New to this edition is a probability measure for recession in North Dakota.
The forecast is for recession in the first half of 2008, though minor in magnitude and duration. The probability of recession in North Dakota is rising in the first part of 2008 and then falls in the second half. The calculation indicates only the probability of recession, not a guarantee. The growth forecasts do not indicate recession. You can find the report here.
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No Bear Market (3/17/2008)
The acquisition of Bear Stearns by JP Morgan Chase represent just the latest casualty of the current asset market crisis. However, there is possibly some positive news from this.
First, finally there is a sign of some market penalty for firms that fail to adequately assess the risk they undertake.
Second, the Fed is showing creative thinking as far as dealing with the crisis. Liquidity alone is not the answer. Anytime the business press is surprised by your actions you are thinking creatively, outside the box if you care for that expression, and the action has a good chance for success.
While there may be some more pain and friction in store for the near future the events of the last few days may indicate that the bottom is near and that an upswing in the future is possible.
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