Bernanke has warning for Wall Street – Oct. 15, 2007

Bernanke has warning for Wall Street – Oct. 15, 2007

On the financial front. I have to admit that I follow the world of finance probably more than I have time to, however at this point I consider it more a hobby than anything else. Every once in a while there is a sermon illustration that comes out of this, but mostly it is just for pleasure.

I ran across this article tonight about Ben Bernanke, Fed Chief, who was attempting to explain why the Fed cut short term rates by 50 basis points (.50%) this past meeting. I am still not sure I am in agreement with the Fed’s latest rate cut but do realize the need for liquidity in the capital markets. Liquidity brings about confidence that buying and selling will continue and that investors are able to continue make transactions. Without this confidence, the market comes tumbling down.

But what the Fed did was bail out a bunch of overleveraged and overly-aggressive institutional investors who made large bets in the sub-prime credit market. Instead of getting hit with the full-force of a credit implosion due to foreclosures and asset write-downs, the Fed created a soft landing where the losses were manageable (ie. large but not catastrophic). But what this has done is to probably create more aggressive trading strategies in the future. Hey, why not go for broke, because if we lose the Federal Govt will bail us out if we are big enough. This has happened time and again starting in the 80s with the Savings and Loan crisis, the 90s will Long-Term Capital Management hedge fund and right up until today.

At some point, the market, to be a true market, must have true winners and losers. Every time someone gets bailed out, it simply hides the true risk and ups the ante for the next round It is an ever growing cycle of risk that, at some point, will create a big enough mess that no govt entity can solve.

I am sure there is a sermon in here somewhere!