Hey, Obama! Eliminate risk, eliminate reward
Today's Financial News - Posted June 15, 2009
The equities market is deep in the red today as Wall Street studies the latest news out of Washington. Giethner and his team have leaked just a bit of their plan to make the nation safer for investors, but the action is already eliminating large sums of wealth.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): The current administration says a lot of things that scare me, but this morning’s comments made the top of my list. Even scarier, nobody is reacting.
Following its typical cycle, Team Obama announced early Monday that it would be announcing plans for a sweeping market overhaul later in the week. The pre-announcement process is a signal to the media to start expecting “anonymous” leaks from the White House in the next few days.
That way when the announcement is made and the nation “officially” finds out we are losing more freedom and prosperity, it won’t hit with such a strong punch. Our guts were numbed by a week’s worth of smaller hits.
One line out of today’s report shows what we are dealing with.
“The financial system failed to perform its function as a reducer and distributor of risk,” wrote Tim Geithner.
I could not disagree with the statement any more. The system worked flawlessly, or at least as good as a haplessly managed economy could.
The problem is not the system, but the folks that were expecting something different.
Prosperity for all, except the rich
Anybody who has ever invested knows the first rule of the game: the higher the reward, the higher the risk.
It is the reason Treasuries come with 3% interest rates and speculative here-today-gone-tomorrow biotechs often pop by triple-digit proportions.
Investors wanted the big returns, but they were not willing to pay for the risk. More succinctly, they were ignorant to the risks. But is that the markets fault?
When the market was climbing and climbing and climbing all the way to record highs, even as oil prices soared, did you ever hear Barney Frank saying, “Whoa boys, let’s slow down and take a look at the situation”?
Absolutely not.
Washington was too busy trying to push everybody into the market instead of warning them about taking on too much risk.
They should have been dropping pamphlets out of the sky educating the masses about risk and reward structures. But who would run their campaigns?
Even before Washington can hash out any new regulations, the markets took care of the situation and cleared the table.
Right now, Wall Street has found some middle ground. We are 40% below record highs and 40% above the March lows.
The risk/reward equation has found new balance. Unfortunately it wiped out trillions of dollars in the process.
But was it the market’s fault or was it greedy investors?
Of course politicians will never lay the blame on the voters, so they will try to re-write the laws of the economy.
What they forget is the free markets are completely sovereign and do not care who props his feet up in the Oval Office.
Obama is going to try his best to create a safe Wall Street, but realize one thing. If you want to make money, you will have to risk money. If investors cannot make their money here, they will go somewhere else.
Today’s action on the market is a preview of what is to come if Obama has his way. If he eliminates risk, he eliminates reward.
Next Article: TFN Reader Grapevine: Dwayne’s update for GNTA, SNBP and HRNF
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