An interesting side effect of me working as a consulting leader in financial services domain is that a lot of interesting fundamental questions get thrown my way from friends and family on how the amazing “never ending” bull market suddenly turned into reverse gear , and if there were things we could have done earlier to ease the pain.
Let me share a few – strictly personal – thoughts.
Role of government
When crisis happens – we only get to see the Fed Reserve in action as the face of the government. Fed only can help with monetary policy and regulation . It can lower interest rates to boost the economy – but it can’t force anyone to spend it in value adding ways. That needs fiscal ( and other) policies to work side by side, which the Fed cannot influence directly . For example – if we needed to invest in infra, we could have done a lot more when money was cheap compared to now. Political division doesn’t let fiscal/education/health etc policy to evolve fast enough to make it timely and provide cushion for future shocks.
Fed itself is caught in a weird dilemma now – their charter is to ensure full employment and stable prices. But the fight for taming inflation unfortunately will need at least temporary unemployment to happen before they can ease off on interest rate hikes . And just when tightening was peaking, they now have to put more money into the banking system to ease some pressure. It’s a very hard place that they are stuck in. They have to choose the lesser evil at every turn!
Role of corporations
When money was cheap – a lot of corporations just used it to buy back shares and pay dividends and so on. Plenty of existing assets changed hands too via M&A. All of those are not bad moves in themselves – but it meant they couldn’t find a way to invest in enough new products/assets/services with a better ROI. In a capitalist economy – economic incentives will drive exactly what these companies did. Are we actually as innovative as we think we are? I hope we are – and I hope the last decade was more an exception than the rule.
Role of financial services institutions and markets
A lot of innovation does happen in FS . Just look at the kind of financial instruments that were invented and sold in the last two decades – they are incredibly complex and sophisticated . But remember – financial services are enablers of the real economy but they are NOT the real economy themselves. The health of the capital markets should be a reflection of the underlying economy – but in reality, it’s flipped the other way around. We measure the health of real economy now by watching how the capital markets function instead! It’s set up backwards !
Cheap money for a decade or more has made risk taking look easy . Remember the “taper tantrums” that the markets threw when Fed tried to say that they want to rein in interest rates just a little over a period of time? Fed had to back off quickly when market got annoyed .
Markets and corporations both have to gain some balance about the fundamentals of real business and stop using stock price as the primary measure of success. Otherwise we will never get out of the high highs and low lows .
Our role as consumers
Our own pension and 401K are all connected to how well the markets perform. We collectively carry a lot of credit card debt, and net worth is largely our primary home for many of us . So we are all vested in having a perpetual bull market and low interest rates, irrespective of the side effects.
We are not all equally well educated on the financial system though – including basic skills in personal budgeting. While we are a sharply divided country ideologically on political lines – we don’t largely involve ourselves in actual politics like standing for elections ourselves or serving in civic bodies etc. If we don’t plan to actively involve ourselves in politics – the next best thing to do is to learn enough to elect the best possible representatives to watch out for us. The best advice I got as a young man was from Dr Kevin who taught me financial management in business school . He told me “All you need to do is to try and live under your means and invest for the long term”. A quarter century later – I can’t think of better advice to give my daughter .