A friend recently emailed me some links that warn of impending financial disaster. He noted that I don't often write about economics, which is true.
So I took a look at a couple of the sky is falling posts and will report on my impression of them. Which is, in a word, yawn. I don't feel a pressing need to invest in an umbrella to protect against sky pieces.
My first stop was "Is the US Goverment Preparing the Lifeboats for the Next Financial Disaster?" I guess this title is supposed to be critical of the (misspelled) government. But isn't it better to have a lifeboat than to go down with the ship?
The post references a longer analysis of supposed proposed rule changes by the SEC and the Obama administration.
The primary concern seems to be the new ability of money market fund managers to freeze redemptions (withdrawals) of funds at their discretion.
"A key proposal in the overhaul of money market regulation suggests that money market fund managers will have the option to 'suspend redemptions to allow for the orderly liquidation of fund assets.'"
Well, it's hard for me to get freaked out over an effort that would stem panicky bank runs. This sounds like a good thing, not a bad one.
Maybe the author of this post doesn't realize that banks don't have a big vault where everybody's deposits are kept in cash. Money comes in to a bank, and then it is loaned out -- or otherwise invested.
So only a certain amount of cash is available at a given time. If every depositor lined up outside the bank and demanded his or her money in green stuff, it'd be impossible to immediately satisfy them.
Modern money market funds appear to be even less cash'y. I'm vague on how the inflows and outflows work, but the "bank run" principle seems to be the same: if every owner of a fund wanted all of their money cashed out pronto, it would be very difficult, if not impossible, to accommodate the requests.
Government regulations help protect investors against excesses. Excessive risk-taking. Excessive greed. Excessive duplicity. And also excessive panic.
The New York Stock Exchange has "circuit breakers" that halt trading for a while when the Dow Jones Industrial Average is sinking like a stone.
In response to the market breaks in October 1987 and October 1989 the New York Stock Exchange instituted circuit breakers to reduce volatility and promote investor confidence. By implementing a pause in trading, investors are given time to assimilate incoming information and the ability to make informed choices during periods of high market volatility.
Most stock trades are done by professionals. Yet it's realized that even investing pros need to take a deep breath at times and not follow a panicky sell, sell, sell herd mentality.
The general public is even more prone to making the wrong investment decisions at the wrong time. Lots of studies show that people tend to buy at market peaks and sell at market lows.
That's why I've become a big fan of index investing, as noted in this post. I wrote it in early March of last year, when our portfolio was down about 30%, compared to the broader stock market decline of 40-50% since the big downturn began.
I just checked our Mint (a great financial web site) chart. We're now down less than 5%. If we'd cashed out of the markets when things looked absolutely horrible, our losses would have been locked in.
Sometimes people have to be protected from themselves. I've been investing for over thirty years and have come to understand the dangers of me believing that I can time the markets. Many (or most) people haven't come to this realization.
I'm a libertarian on quite a few social issues, but not when it comes to regulation of the financial markets. So regulate away on money market accounts, SEC and the Obama Administration.