Tags: Santoli | financial | crisis | mortgage

Yahoo's Santoli: Battling the Last Economic Crisis Is No Help for the Next One

By    |   Wednesday, 06 August 2014 01:14 PM

All of America's defenses are engaged in fighting the last war on financial excess, which means the next meltdown may be a surprise as usual, according to Yahoo Finance's Michael Santoli.

He pointed out recent headlines that the Justice Department is launching fresh probes into subprime lending (this time for automobiles instead of homes), that Moody's has downgraded U.K. banks, and that Goldman Sachs is tightening terms on hedge fund clients because of higher capital requirements from regulators.

"The causes and traumas of the credit bubble and crisis — and regrets for failing to arrest them — have been burned into the minds of financial players and government officials," Santoli wrote. "As a result, they continue to act in ways they wish they had eight or 10 years ago, fighting the last war before the threats grow dire."

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In his opinion, none of the new publicized problems present clear danger to the economy or financial markets.

In fact, there may even be a possibility the medicine is more harmful than the illness it is supposed to cure.

Santoli noted rising concerns that tougher capital requirements and stricter rules on proprietary trading among big banks is wringing too much liquidity from credit markets.

"Bank dealers have record-low inventories of bonds, in part because they don't want to hold expensive capital against them. Meantime, the amount of debt outstanding has ballooned and exchange-traded funds promising real-time liquidity . . . have become big, foot-stomping players in the market."

Another new unintentional worry is that post-crisis bank regulations now permit the debt of EU governments to be treated by banks as having no credit risks.

"This creates incentives for them to buy bonds of even lower-rated euro issuers, which early this year saw their yields collapse, pulling global credit spreads lower with them," Santoli said.

He predicted that tougher marketing rules and documentation is unlikely to really stop the flood of cheap cash going into loans for the booming new and used car marketplace.

Santoli noted that after the 1990s tech bubble collapse, Wall Street and federal regulators put a tighter lid on the oversight of the runaway tech IPO market, but that did nothing to stop the 2008 mortgage lending meltdown.

He noted consumer confidence that a fresh stock market meltdown is not coming has been below 40 percent for five years — an extraordinarily long time.

"This persistent mood of suspicion probably creates its own check against too much giddiness infusing the markets too quickly. But it doesn't provide much protection against a whole new, unexpected financial bug coming to bite us from a place we haven't thought to look."

Speaking of unexpected financial threats, Wealth Daily noted Argentina defaulted July 30 on its sovereign debt, which may have had a ripple effect, as global stock markets happened to selloff the next day.

According to Wealth Daily, there are 10 other nations now lined up as potential defaulters, with corresponding danger to inter-connected global financial markets if they begin to fall like dominoes. Those 10 potential defaulters are Belize, Cuba, Cyprus, Ecuador, Egypt, Greece, Jamaica, Pakistan, Ukraine and Venezuela.

Alex Pollock, resident fellow at the American Enterprise Institute, takes the position that America has amnesia about the 2008 financial meltdown, and may be doomed to repeat it in some ways.

Perhaps ominously, he wrote in The Wall Street Journal that the Federal Reserve "has designed its own regulatory accounting so that it will never have to recognize any losses on its $4 trillion portfolio of long-term bonds and mortgage securities."

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

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All of America's defenses are engaged in fighting the last war on financial excess, which means the next meltdown may be a surprise as usual, according to Yahoo Finance's Michael Santoli.
Santoli, financial, crisis, mortgage
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2014-14-06
Wednesday, 06 August 2014 01:14 PM
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