Federal Reserve Independence is Gone

Central banks were set up for independent banking functions, on the premise it’s best for a country to keep its financial system from political influences.

Politicians have always had a tendency to produce financial and economic pressure to change any banking independence during stressful economic times.

How are major central banks doing with regard to their current national financial crises?

The Bank of England has been relatively independent but rather involved with its government bond market. The Bank of Japan has been somewhat independent since 1998 but it often has been politically directed.

Congress, which always loosely supervised the Fed now wants audits and more disclosure, which would exert pressure. However, the Dodd-Frank Act now has the Fed go more deeply into the American economy than it had before, and the present Fed Chairrnan, Ben Bernanke, has had a tendency to lean more to administration policy.

Human Investing Behavior

Research on human investment behavior indicates how personal psychology has lots to do with the way securities markets operate.

I have mentioned in the past my studies and evaluations of over 1,600 investment strategies, and their pros and cons. In addition, I have always said there is no one that I have found to be better than any other. What makes for investment success is strict discipline of strategy use.

Psychology controls discipline.

Furthermore, discipline can be mastered, with proper personalized control over those psychological hazards.

I would suggest investors look at the work done by Kahneman and Tversky on investing behavior. It will provide a glimpse of how investors think, often to their disadvantage. ( See the Earl J. Weinreb NewsHole® comments.

Derivatives Are Not The Villains

Remember the hullabaloo about securities derivatives, such as interest rate swaps and credit default swaps? And their connection with subprime mortgages and collateralized debt obligations? With their role in the financial meltdown?

The left rails against derivatives. That CDS (credit default swaps) caused the financial meltdown in the mortgage market. But there was a much larger market in interest rate swaps, and there was no problem with fixed income assets.

And there was an even larger market in foreign exchange swaps, than in CDS, and there was no problem in the currency markets.

So derivatives were not the main cause of the financial meltdown. AIG lost $39 B on derivatives but also $24 B on mortgages with no derivatives. The counter-parties on derivatives were paid off 100 cents on the dollar.

The problem was the housing market.

After all, government excesses, such as poor monetary policy, produced economic problems, not bankers who become bystanders by necessity and happenstance.

Those Nasty Bankers?

Listening to comments and opinions of those from all walks of life, most folks know little about finance and banking.

I place politicians on the left at the top of my list, among this group of financially ignorant. I insist, If they knew more about finance, they would not be intellectually on the left.

So, it is entirely understandable that bashing bankers is always fashionable, especially during economic recessions. Finding scapegoats is handy. It makes up for any guilt politicians have in helping foment our economic distress.

The Depressed Japanese Economy

The Japanese Nikkei Stock Average is about one quarter of its value at the end of 1989; it’s still sharply well off that peak.

We know about Hitachi and Nissin Foods corporate growth but the Japanese economy has been flat and practically dormant for over the past twenty years. This has been the case despite huge Japanese government spending, Japanese public debt is now over 200% of GDP.

Unfortunately, it does not appear their economy will recover anytime soon.

The problem for the U.S. is that the Obama administration has been on a wild tear to “stimulate” the American economy, much the same way the Japanese attempted two decades ago, to spend their way to prosperity. Which they have failed to do.

Note: The Japanese do not have a global reserve currency to protect as the U.S. does.

Buying Bonds When Inflation Looms

I would strongly advise everyone to be fully aware of what the principle of duration is and how it works when investing in bonds. Very few media pundits write on the practical use of bond duration and its adaptation TO inflation, rather than avoidance OF inflation.

Much of the practical value of media portfolio advice, particularly as it applies to bonds, is, unfortunately, used merely to fill up space and not to truly enlighten. ( See the Earl J. Weinreb NewsHole® comments.

Questionable Media Portfolio Advice

Media portfolio advice is often a farce.

Giving advice on investment portfolios without regard to a client’s age, family condition, and needs, is ridiculous. Everyone has a different investing time horizon and current and future income needs. Those factors affect the choice and percentages of securities

And where bonds are chosen, the “duration” of the bonds and the practicality of low-cost fund automatic reinvestment of their earnings, are paramount. ( See the Earl J. Weinreb NewsHole® comments.