Fisher Investments Editorial Staff
US Economy

Yogic Wisdom

By, 03/27/2009

Story Highlights:

  • After unveiling more details on his "toxic asset" removal plan, Treasury Secretary Geithner moved on to address financial regulation.
  • His proposals include a new centralized financial regulatory authority, tighter control of hedge funds and certain "exotic" financial instruments, and broader powers to place private firms into conservatorships.
  • In theory, most of his suggestions sound fine. But even more importantly, they're likely less risky to stocks' long-term prospects than they seem.


Yogi Berra once said of a White House dinner he attended, "It was impossible to get a conversation going; everybody was talking too much." Smart man. Just ask Treasury Secretary Timothy Geithner, Congressional rag doll. After Beltway critics, markets—and heck, pretty much the whole nation—panned his first attempts at communication, Geithner went back to the drawing board. This week he came out firing. And like it or not, the conversation's been on his terms so far.

First, he unveiled a more detailed version of his plan to remove "toxic" assets from balance sheets. From there, he swiftly moved to address regulation. It's no secret US financial regulatory agencies are, to borrow his word, "balkanized." Historically, creation of new regulatory agencies has been reactionary and inefficient—one overlaid on the other. By ignoring the bigger picture, the feds have "blessed" us with an often overlapping and confusing system. (More Yogic wisdom: "If you don't know where you are going, you might wind up someplace else.")

Thus, this week Geithner proposed a new central authority to oversee the whole financial sector. Not a bad idea. We've noted in past commentary the likely benefits of just such a move if done even moderately well. Other proposals included stricter regulation of hedge funds and "exotic" financial markets like credit default swaps (CDS). While we're generally of the mind free markets should be free, a degree of regulation, if clear to all participants ahead of time, can make markets more transparent and efficient at pricing risk. (And we've already seen some increased transparency in CDS markets.)

But what about expanding the FDIC's authority to place failing banks in conservatorship to include non-bank firms like AIG? If you tend to view government interference with a jaundiced eye, that might frighten. But the FDIC has a pretty decent track record and system for performing such tasks. And if expanding these powers avoids messy federal ownership scenarios like the government's majority stake in AIG, then this might be a benefit.

What's the likeliest net effect of all this for investors? It's too early to deem the plan irrevocably treacherous—and it's probably not anyway. All together, we could see little material improvement or change for the better. In either scenario, a regulatory overhaul could be less risky to stocks' long-term prospects than it may seem at first.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.