Have We Learned Nothing From The Financial Crisis?

August 28, 2017

This is another great article by our friend Jesse Felder. He focuses on the banking sector and how the moves since the election have not been reversed even though the yield curve is flatter and Trump has done nothing in terms of regulation.

The post brought up a recurring thought that has been floating around for this whole year. Is the market completely wrong about future expectations?

Click here to visit Jesse’s site for more great postings.

One of the hottest ‘Trump triumph trades’ late last year was the financial sector. Banks stocks soared in the immediate aftermath of the election leaving some to question why they were so strong.

Typically, the banks relative performance to the S&P 500 is highly correlated to the yield curve and this makes sense. When the yield curve is steep, banks can earn greater net interest margins (by borrowing short and lending long) and vice versa.

However, the yield curve has flattened dramatically so far this year and bank stocks have failed to give back their post-election rally. This leaves me to conclude they are pricing in something other than rising net interest margins.

It seems investors are hopeful that the Trump administration will remove much if not all of the financial regulations put in place after the financial crisis. In fact, this is one issue House Republicans have actually been able to get behind (even if their colleagues in the senate haven’t… yet).

In response, Stanley Fischer, Vice Chairman of the Fed’s board of governors, recently came out with a strong warningagainst this trend calling it, “very, very dangerous and extremely short-sighted.”

I know it’s been a decade now since the financial crisis began but for those who don’t remember it there are just two chart you need to see to understand both the dangers of banking deregulation and its stubborn persistence.

First, it’s very clear that when appropriate regulations are in place, financial stability is both vibrant and enduring. When they are removed financial stability rapidly erodes and we get a crisis or even a series of crises.

So it would seem very obvious that financial regulation is a good thing, even a necessary thing, for the health of the economy. Still, what’s best for Main Street is not what is most profitable for Wall Street. In fact, there is a very tight correlation between deregulation and Wall Street profits and this is precisely why financial deregulation rises from the dead time and time again.

Ultimately, Wall Street bears the cost of economic stability and Main Street bears the cost of financial crisis. Wall Street thus counts on Main Street’s short-sightedness in order to fatten their wallets at everyone else’s expense. And this is exactly what the bank stocks are pricing in today.

I, for one, sincerely hope Mr. Market is wrong.

    Aug 28, 2017 28:12 PM

    HAVE WE LEARNED NOTHING FROM THE FINANCIAL CRISIS? Maybe a few people might learn but most will never learn and will verbally or physically attack those who try to teach or tell the truth. This is why history repeats or rhymes.