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David Callaway
April 1, 2010, 12:01 a.m. EDT · Recommend (1) · Post:
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Why won't emerging markets emerge?
First Take "º
Rebound is real -- but on fragile footing
By David Callaway, MarketWatch
SAN FRANCISCO (MarketWatch) -- As a sequel to Obamacare, financial reform is proving quite a dud.
The public, almost two years on from the heart of the financial crisis, is losing or has lost interest, and the real battle between Wall Street's lobbyists and Congress is fraught with jargon and political agendas. Eventually, the president will get on message -- reform good, Wall Street bad -- and a bill will pass before the midterm elections.
As a compromise, it will contain the so-called Volcker rule, which prohibits regulated banks from proprietary trading. It is small beer in the scheme of things but plays well as a sound bite issue: Stop banks from putting their own money ahead of the public good.
A handful of Wall Street banks have become more powerful and influential during in the financial crisis. Simon Johnson, author of the new book "13 Bankers," argues that minding banks too big to fail isn't enough. He tells columnist David Weidner that big banks need to be broken up into pieces "small enough to fail."
The plan to allow the government to break up the six largest banks, however, will not pass in either its House or Senate form. It is too arbitrary and will either be taken out -- like the public option in health care -- or substantially weakened, perhaps allowing for some continued, lame form of industry self-policing.
But one thing that would go a long way toward recapturing public attention and producing change on Wall Street would be for the Federal Reserve Board to start raising interest rates, and sooner rather than later.
Almost all signs are that this is going to happen. Investors are preparing for bond yields to head higher and the end of the massive bond rally in the past year.
See the April edition of Trading Strategies: How to invest in a rising-interest-rate environment.
Economic growth continues to improve and corporate earnings in the first quarter are expected to be solid, as companies generate profits from holding employee costs down.
The final piece of the puzzle, some sort of indication that jobs are starting to grow again, could come as soon as Friday when the March jobs report comes out.
Economists surveyed by MarketWatch expect 200,000 new jobs were created last month, in part because of the U.S. census effort. If true, and it seems rather optimistic, it would be the largest monthly expansion since November 2007 and only the second month of jobs growth in 27 months. See Economic Preview.
It would be unlikely to convince the Fed to start raising rates right away, though, which is a bad thing. The central bank appears paralyzed by the jobs issue and will likely want to see a couple of months of payrolls growth before it starts putting on the brakes.
That's too bad because a lot of consumers and savers, particularly those in or near retirement, have been getting crushed by the virtually zero rates of return on their savings accounts and certificates of deposit. Lots of people lost a ton in stocks in the financial crisis, and are earning next to nothing on what's left of their savings.
Meanwhile, the banks are making a killing on the Fed's easy-money policy and have little incentive to get back into the lending game. It was low rates that sparked the derivatives boom that caused the crisis in the first place, as big institutions devised new ways to generate better yields.
Higher rates on the other hand, would improve the investment returns for millions of potential consumers and spenders, as well as giving the banks new ways to make and circulate money through more lending. It would also encourage a higher national savings rate, which we desperately need.
The beginning of a rate-rise cycle will also boost equities. Despite the hand-wringing in the press and on Wall Street about a turn in rates, the S&P 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,172, +2.50, +0.21%) rose almost 5% in the first quarter, in the face of an impending change. The sooner the Fed gets it out of the way and eliminates any uncertainty about its intentions, the better.
The Fed clearly fears that higher rates will kill the tentative rebound in the housing market, or make the commercial real estate downturn even worse. But the limbo we've been in for the past 12 months -- low returns, low trading volumes -- is holding the markets back from finally getting past the crisis.
Going to battle against bankers and their lobbyists is always a worthy effort. But it's the little guy who got hurt the most by the crisis, and it's the little guy who will eventually lead the country back out of it. Obama and the Fed should do everything they can to kick start that process. The Fed raising rates would be a great beginning.
David Callaway is editor-in-chief of MarketWatch.
David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A financial journalist for more than 20 years, Callaway has worked for Bloomberg News, the Boston Herald, and assorted television and cable stations as a reporter, columnist and commentator.
Manufacturing surveys from across the globe are nearly all pointing in the right direction -- but that doesn't mean the advance is sustainable.
10:31 a.m. Today10:31 a.m. April 1, 2010 | Comments: 12
- Marsden | 4:53 a.m. Today4:53 a.m. April 1, 2010
"Best financial reform is higher rates: Going to battle against bankers and their lobbyists is always a worthy... http://on.mktw.net/9gvQUE" 11:18 p.m. EDT, March 31, 2010 from dcallaway
"China, Russia and the eternal emerging markets: Despite growth and modernization, China, Russia, Brazil, Indi... http://on.mktw.net/8XEFQw" 12:18 a.m. EDT, March 25, 2010 from dcallaway
"Guinness-fueled market rally looking frothy: We are heading toward a day of reckoning; a point likely in the ... http://on.mktw.net/9a0cNF" 5:28 p.m. EDT, March 17, 2010 from dcallaway
"A sure sign the Greek crisis is over: Blame, in all its forms, is a lagging indicator. So when politicians an... http://on.mktw.net/dzRMEr" 12:29 a.m. EST, March 4, 2010 from dcallaway
"Congress finds new low with high Toyoda praise: Edward Liddy, Timothy Geithner and Lloyd Blankfein have to be... http://on.mktw.net/96VPnL" 7:38 p.m. EST, Feb. 24, 2010 from dcallaway
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