The first quarter of 2008 will most certainly go down in history as one of most turbulent ones in modern financial history. Think about what has happened? ( in no particular order) The credit markets seized up leading to the collapse of the fifth largest investment bank, Bear Stearns. Banks and other financial institutions reported unprecedented losses. The stock markets around the world got rocked. The Federal Reserve went to uncharted territory through massive rate cuts, opening their window to investment dealers, and supported a bank purchase of an investment bank. Large private equity deals have and are going bust. Investors in ‘safe’ securities called auction rate securities lost access to their funds. Housing values continue to tumble. Thousands upon thousands of people across the country are and will face foreclosures on their primary residences. The US economy is most certainly in a recession while the dollar continues to lose value against other currencies and inflation and unemployment are on the rise. Sadly I could go on and on. No wonder people are not happy?
So what lies ahead? Most are just hoping that the worst is behind us but sadly, I do not think it is. The problems are big and it will take a while for it all to work out. In the mean time it makes sense to play it safe financially, investment wise and spending wise. That does not preclude looking for opportunities for long term investments, but it does mean that one should be sure to maintain enough liquidity to ride through the storm. And a storm there will continue to be.
I would like to offer a few words about the announcement today regarding a BLUEPRINT for overhauling the financial regulatory system. The timing of this announcement seems a little crazy to me. The government is clearly trying to send a message of ‘being in control’ but releasing a 200 page document which throws in to question the roles of all the regulatory groups that need to be focusing on the current crisis seems irresponsible. Knowing a little bit about human psychology I would suggest that threatening to change, if not take away, peoples jobs at the same time as you are requiring them to work harder then ever is not a smart thing to do. Hank Paulson said moments ago on CNN that it is his and the authorities number one priority to help manage through this financial turmoil and housing market downturn, and to me, they should be staying focused on that goal. Do we need massive restructuring of the regulatory system to create better alignment with the realities of today’s complex financial system, of course, but now is not the moment to throw the blueprint for that out there.