Friday, Jan. 16, 2015

The reality of American elections is that, when power changes in Congress, the supporters of the newly elected congressmen or Senators expect their voices to be heard concerning legislation. The greater the support (read money), the faster the new Congress will move legislation near and dear to their supporters hearts. Currently the new Congress is looking to reform/modify/gut the Dodd-Frank act concerning the regulation of Wall Street.This comes at a particularly bad time because bank earnings are under pressure from decreased trading revenues. 

In 2008 the the world banking system almost collapsed. The banks having been trying to sell the narrative that the problem was lower-income people buying houses they couldn't afford. The truth was that banks and brokerage houses were trading products they either didn't understand or knew were bad and they just didn't care because they made so much money from them. Since 2008 the banks have demonstrated no particular ability to manage risk i.e. JP Morgan and the 6 billion dollar loss with the "London Whale".  Wall Street is pushing Congress to change the Dodd-Frank Legislation to enable banks to continue to trade derivatives. Derivatives were the basis of the toxic assets that the banks foisted on investors and necessitated the bail out. 

This confluence of events, namely banks looking for earnings, a Congress sympathetic to Wall Street, very compliant Federal Reserve monetary policy, and a short memory of just how bad 2008 was, seems to me to be a recipe for disaster.