I hate to say it, but what this country needs is another financial crisis

I hate to say it, but what this country needs is another financial crisis

By Allan Sloan, Friday, May 24, 10:38 AM

Almost a century ago, Thomas Marshall, Woodrow Wilson’s vice president, got tired of listening to senators blather on about the nation’s needs and uttered the words that made him immortal: “What this country needs is a good five-cent cigar.” Today, with 24/7 blathering as our national political pastime, let me adapt Marshall’s 1917 remark: What this country needs to get its act together is a good five-alarm financial crisis.

I mean, look around. Except for the Federal Reserve, which has consistently tried to help the economy, misguided though some of its actions may be, about the only real changes our government has made since the onset of the financial crisis were induced by fear. The Troubled Assets Relief Program, which played a vital role in restoring confidence and stability to the financial system, was passed only because the House’s rejection of it on Sept. 28, 2008, set off a 778-point plummet in the Dow. That scared the House into reversing itself.The only parts of the budget sequester — an exercise in economic idiocy — that have been modified are the Federal Aviation Administration cutbacks that caused air-travel delays bad enough to scare politicians into action and food inspections. The sequester, remember, was a doomsday device created to resolve the debt-ceiling crisis in 2011, on the assumption that sequestration was so stupid and damaging that people would do anything to keep it at bay. Yet, here it is.

Now, for the third time in two years, we’re dealing with a debt-ceiling drama. The previous two times that Republicans played this game — the summer of 2011 and year-end 2012 — they damaged the country’s financial credibility for no discernible gain to themselves. Why they think the third time will be the charm is beyond me. I blame the Republicans (my former party) more than I blame the Democrats (my previous former party) for our national gridlock. But the Democrats are no prizes either.

Take the budget deficit, which is shrinking rapidly. Many Democrats are declaring victory, saying that everything is heading in the right direction; there’s no need to cut the growth of Social Security, Medicare and Medicaid; it’s all under control. But if you read the nonpartisan Congressional Budget Office’s recent analysis, you see that everything is far from fine for the long term.

Part of the deficit decline comes from the higher tax rates that went into effect this year, and part from the economy’s growth. But a good part of the shrinkage is from one-time items that will disappear, such as an increase in this year’s income-tax collections because companies accelerated some 2013 dividends and bonuses into last year so recipients could avoid the Jan. 1 tax increases. Another factor is the lower-than-previously-projected interest rates on the national debt. But they won’t last indefinitely, because the Fed has begun warning markets of rate increases.

I had expected our leaders to have rational conversations after the poisonous 2012 elections were over. I was naive. The Democrats, smelling blood, pretended to reach out to Republicans but really didn’t. Now, smelling blood over Benghazi, the IRS and news media phone records, Republicans aren’t even pretending to be playing nice.

Calm down, you say. Stocks are at all-time highs, house prices have recovered, and corporate profits are strong. What could possibly cause a crisis?

For starters, we still have too-big-to-fail banks that depend on short-term financial markets, which could dry up in an instant, as in 2008–09. Some, including former FDIC chairman Sheila Bair, think the government now has the tools to deal with this. I respectfully disagree.

The debt-ceiling question, supposedly on hold until September, has disaster potential too. If we slip over the brink this time, it could spook foreign buyers, run interest rates way up, run stocks down and spark a financial panic.

I don’t want to see a crisis, and I hope our alleged leaders, who aren’t stupid, bestir themselves before one strikes. But I sure wouldn’t count on it. Too bad for them. Too bad for us.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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