The Tally Stick

Taking measure in our times

The hypocrisy of the Federal Reserve and risk taking

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It is clear that CNN actually did their homework on this piece of writing.  There is a strong scent of hypocrisy when you have them discuss regulating banker’s compensation that has been driven towards excessive risk taking when every-time we have a financial crisis in the United States, the Fed’s response is to lower our overnight lending rate.

When you bring rates of interest lower than it would naturally be in a economic environment, you actually promote speculation and risk taking because the normal means of getting a solid rate of return are no longer available, like government or investment grade corporate debt.

In this country our representatives that control and monitor our financial system have decided that it is better to bailout than to let organizations fail, especially in our financial sector.  The problem is that the failures are just as important as the successes.  It is the natural darwinian way to allocate capital from the hands of managers that made bad decisions, too the hands of managers that made prudent choices.  This notion of “too big to fail” is another misnomer that seem to keep persisting.

You can not tell us that if all the major money center banks that would be insolvent if it were not for our generous bailouts would make the whole system fail.  Yes, it would be painful but after the shock was past, good banks would pick up the slack.  As long as there are good loans to be made, we will see capital come together to make these loans.

Instead we are seeing the inverse, where the large money center banks are actually profiting while the regional and local banks are failing or being acquired.

CNN, New York – Are there any mirrors in the headquarters of the Federal Reserve? If so, I think it’s time for Ben Bernanke and his colleagues to look into one.

The Fed, according to a Wall Street Journal report Friday, is said to be considering a plan that would allow regulators to closely monitor and even change the pay practices at financial firms in order to make sure that these companies aren’t encouraging excessive risk-taking.

Considering that the mess that we find ourselves in is partly due to big banks and insurance firms failing to recognize the many subprime warning signs in order to satisfy Wall Street’s myopic focus on quarterly profits, reining in bonuses and other compensation tied to stock performance may not sound like a bad idea.

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Written by Tally Stick

September 23rd, 2009 at 9:06 pm

Posted in Commentary

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