Better Late Than Never

Every once in a while you read a news story that really surprises you, because it addresses something that you would have bet had been resolved long ago. I had that reaction when I read about the Federal Reserve Board’s recent decision to ban ownership of individual stocks and restrict trading activity by senior Fed officials.

The Federal Reserve, as the nation’s central bank, often takes action that can affect the securities markets–whether it includes decisions about interest rates, tightening or loosening the money supply, or buying or selling bonds to try to ensure market liquidity or shore up the balance sheets of large financial institutions. Anyone who follows the financial markets knows that daily market movements, up and down, are often attributed to reactions to what the Federal Reserve has done, or said. You would be hard pressed to find any federal agency that has a more direct effect on the financial markets.

The Fed found itself caught in a controversy recently when the news media reported that certain Fed officials were buying and selling stocks while the Fed was taking aggressive action to respond to the financial fallout from the COVID-19 pandemic. Two Fed regional presidents resigned after their trading practices during the pandemic were disclosed.

Under the new rules, senior Fed officials will not be able to own individual stocks, bonds, agency securities, or derivative contracts and will be restricted to holding interests in mutual funds, which they will have to sold for a year. (Mutual funds are viewed as more diversified assets and therefore are less likely to be directly responsive to potential actions taken by the Fed.) And no trading of any kind will be permitted during times of “heightened financial market stress.”

Given all of the regulations that are imposed on every facet of American life, it’s surprising that the restrictions announced by the Fed didn’t exist already. The new rules should remove any temptation or concern about self-interested decisions, but it is also interesting that the rules are self-imposed. It might not be a bad idea for Congress to take a deeper look at the issue, and consider whether there is a need for laws to regulate the securities ownership and trading activities of Federal Reserve officials.

Greece Is The Word

If you’re somebody who has been saving for retirement and investing your savings in the financial markets, here’s a bit of friendly advice:  don’t check the markets today, or for that matter all of this week.  You’ll just be depressed.

The problem is Greece.  It defaulted on its repayment of loans from the International Monetary Fund last week, and yesterday its voters overwhelmingly rejected a referendum that would have imposed strict austerity measures.  Greece’s finance minister Yanis Varoufakis, who had opposed the austerity measures — he once said that “austerity is like trying to extract milk from a sick cow by whipping it” — then resigned with a flourish, saying that the referendum result would “stay in history as a unique moment when a small European nation rose up against debt-bondage.”

“Debt bondage”?  That’s a good one!  Try it on your bank the next time your mortgage or car payment comes due.

The problem for Greece is that there is no alternative to repaying its debts.  Greece is paying the piper for electing bad leaders who didn’t recognize the inevitable crash that was coming from constant borrowing to pay for a broken economic and pension system.  After defaulting on its IMF loan, Greece really has nowhere to turn for cash.  Who is going to loan money to an impoverished country where the citizens apparently don’t recognize their obligation to repay their debts?

All of this would be a valuable economic lesson in unsustainable borrowing if Greece were just going down the tubes by itself.  The problem is that Greece is part of the European Union, and its problems therefore are Eurozone problems.  Now European leaders need to figure out whether they have Greece exit the EU — not exactly a ringing endorsement of EU political and financial stability — or extend still more credit to the Greeks, which probably isn’t going to sit well with voters in Germany and other prudently managed EU countries who wonder why they are picking up the tab for Greece’s problems.

All of which loops back to affect those of us who have saved and invested.  Financial markets hate uncertainty, and the Greek crisis has now become uncertain to the nth degree.  Today we’ll be seeing news coverage of closed Greek banks, crowds in the streets trying to find cash, and frowning finance ministers going to meetings in ornate European buildings — not exactly scenes that speak of financial stability.  So even though the Greek problem has nothing to do with the U.S., in our global economic system our financial markets will be affected just the same.

It will be a wild ride until the Greek problem is finally resolved, and there really is only one solution:  Greece will need to leave the EU, issue its own currency, and witness the worst hyperinflation seen in Europe in decades.  After its economic system crashes and its elderly citizens see their savings eaten up by inflation, maybe the Greeks will recognize that some austerity and continuing “debt bondage” really wasn’t so bad.