Are we relearning the same old finance lessons all over again?

One of the benefits of experience is that lessons are learned. It is unfortunate that our politicians and financial authorities have ignored the lessons that the Great Recession should have taught.

Hope springs eternal in the financial markets, ones that have been pushed higher by the massive injections of government funds, the biggest infusion of liquidity, that is money, in modern history. Yet, there is an old saying that is appropriate now: if you fool me once, shame on you: if you fool me twice shame on me. Our financial authorities should be ashamed of their repetitive, sleight of hand actions.

Regrettably, along with the enduring hope, comes an acute sense of short-term memory loss. This is most evident in the failure of policy makers to grasp the tough lessons of this business recession. That is dangerous for the economy and for financial markets.

The economic turmoil was triggered first and foremost by the unsustainability of the government stimulus measures, but that in turn was the result of the problems of the unsound borrowing by consumers. That led to gross, global imbalances.

Cash for house renovations, bailing out banks, and funds for infrastructure improvements are emblematic of a penchant for quick-fix actions. And those merely compound the existing troubles.

Financial markets do not seem to care about this.

The onset of recovery, irrespective of the dubious quality and measures implemented, is all that seems to matter for most investors.

The stock markets have surged over the past year, banking increasingly on the hopes and dreams of a classic, economic recovery. The markets’ expectations are centred on the huge rebound in the earnings of financial companies. Those organizations are repeating their practices of the last few years.

They, more than ever, are trading on their own account, as if that is what banks should be doing with depositors’ money.

Too, they have been speculating in lower-grade bonds, and because those markets are thin and trading volume meagre, the markets are volatile and responsive to the big flow of money. Hence, those issues, too, have soared in price.

As well, banking institutions are back lending to improperly secured borrowers, and then packaging those loans in order to sell them to others. Yet, this is just the suspect script followed over the past few years, and look how that ended.

With excess liquidity-funds sloshing into assets markets, and even into real estate again, there obviously is the temptation to erase the memory of the Great Recession.

Therein lies a major pitfall for the markets – a repeat performance of the economic turbulence of the past few years.


Bruce Whitestone