Is it time to clean up the banking system?
It’s finally spring. In New England, spring is great for skiing on corn snow and boiling down maple syrup. It’s also time to muck out the paddock and clean up the mess left over from the long winter. During the deep freeze this year it was impossible to shovel out my animals’ enclosure. Apart from the unpleasant weather, frozen muck breaks the tines on my muck rake when I try to scoop it up. And the deep snowpack covers over the mess so that it’s hard to find.
But once it warms up and the ice melts, it’s time to clean out the paddock and fields. That’s what I worked on this weekend. I took out over 20 wheelbarrows of accumulated “stuff.” While there’s a lot more to do, the fine weather gave me a chance to get a good start.
It’s like that with our financial system, right now. The Great Recession and slow recovery have been like a long winter, making it impractical to make any major changes. With the economy so fragile, any significant modification of the rules could make it tough for companies to get credit, pushing us into a double-dip recession.
But with the economy strengthening and the Fed looking to normalize monetary policy, this seems like a good time to work on the financial system. There are a lot of new rules in the works: Basel III, Dodd-Frank, the Volker Rule. These changes seek to make the system safer—to prevent a replay of the Financial Crisis and subsequent bailouts.
It’s slow going. The financial system is complex. Changes in one area may require adjustments in another. We’ve had some episodes where fault lines have been exposed, like the “flash crashes” in equities and bonds. It’s important that we don’t create new problems when we’re trying to fix the old ones.
May 6, 2010 Flash Crash. Source: CNN
But like mucking out the paddock, it’s important to get started. And who knows? Some of that accumulated “stuff” may turn into excellent fertilizer.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!