Greenspan Defends His “The Crisis” Policies

Alan Greenspan has come out with a 48-page report, named “The Crisis”, in which he has defended the low interest policies of the Fed when he was at its helm. Greenspan, who was speaking at the Brookings Institution conference in Washington, said that it was not the policies of the Fed but a failure to assess systemic risk and predict the huge financial crisis that caused the economic tsunami of 2008. [Read more…]

Revised Financial Reform Legislation Made Public

Senator Chris Dodd, Chairman of the Senate Banking Committee, has released a revised version of the financial reform legislation that intends to prevent another financial crisis. The bill has been redrafted after consultations with several Republicans and Democrats who had rejected the first draft.

The revised bill has incorporated many of the suggestions made by the Republicans, which critics argue would make the legislation ineffective. However, despite the changes, the Republicans have once again opposed the bill.

The key proposals of the bill are:

Consumer Protection Agency

The biggest change that Dodd has proposed is that there should be a consumer protection agency to prevent banks from exploiting customers. This is in response to the subprime crisis where lenders extended a huge number of risky loans that brought the whole financial industry close to a collapse. Many economists were demanding an independent agency to look after the interests of the consumers, but Dodd has agreed to Republican objections and has suggested creation of an agency under the Fed umbrella.

Regulation of Credit Rating Agencies

Credit rating agencies like Moody’s had come for severe criticism after they incorrectly assessed the risk on mortgage backed securities, which crashed in value once the housing prices fell. The bill proposes that these agencies should now be made responsible for their actions and they should be regulated by the SEC to prevent similar errors in future.

Limits on Trading Activities of Banks

The bill has also given a nod to the Volcker Rule, which will restrict proprietary trading of banks. Currently banks can invest the depositors’ money in risky hedge fund trades. Such trades brought many of the Wall Street banks close to bankruptcy as the financial crisis unfolded. Regulation has also been proposed on derivatives trading by banks.

Financial Stability Oversight Council

The council’s job would be to identify risks in the overall financial system so that they can be dealt with before they result in a large scale crisis. However, once again the Fed has been given most of the duties, while the council will only sign off on decisions.

The bill looks like a compromise formula, and it will certainly face a lot of opposition from both pro-reform and anti-reform camps. Another problem is that even if it is passed, the success of the legislation will not be tested until the economy faces another crisis, and at that stage it will be too late to make any changes.

Diversify Your Investments Before It’s too Late

Don’t put all eggs in one basket. This adage holds true even in the highly sophisticated world of finance. Investors have always been advised to spread their investments among different baskets of assets that do not depreciate in value at the same time. This diversification is believed to make investments less risky, as even if one asset starts falling in value, your profits from other assets can offset that loss. [Read more…]

Investment Lessons from the Financial Crisis

The financial crisis and the painful recession are behind us now. Although the unemployment numbers are still very high, there are many reasons to believe that things will soon start improving on that front too. These have been major events, and it is important to learn from them as an investor.

If you were invested in stocks just before the collapse of the stock market, you would understandably be skeptical right now. Many investors lost their faith in the market and have refrained from investing since then. But you have to put your money in some assets, and as the rebound in the stock market since March 2009 has showed, if you time your investment correctly there are still some great opportunities to earn profits. Here are some lessons that you should take away from the crisis to become a better investor.

Don’t Panic

When the stock market was at its lowest levels in 2009, almost everyone had a pessimistic outlook. More bad news was in store, we were told by the so-called financial experts. But investors who were able to shut out the noise sensed an opportunity and their investments have grown by more than 60% since then. The important lesson is to not go with the hype. Analyze the satiation with a calm mind and try to find opportunities.

Think Long Term

Anyone who tells you that you can make assured quick money in the market either has no idea of what he is talking about or is simply fooling you. In the short term, the market is nothing more than a casino. You’ll win some, you’ll lose some, and then you’ll realize that it was a total waste of time. Keep your investment horizon long term. Treat your investments in good stocks as an asset and not as a bet. You should target modest but assured returns instead of going for risky investments.

Diversify

One of the oldest tenets of investing is still one of the most important. When you invest, you should never concentrate all your risk in a single stock. By creating a diversified portfolio, which also has bonds in it, you spread your risk. So if the price of one of your stocks collapses, you would still be able to make up for that loss with profits from other stocks.

Keep these tips in mind and be smart about your investments. Don’t make investment decisions because they feel right, you need to think them through.

Krugman Blames Lack of Regulations for Financial Crisis

Paul Krugman, the Nobel Prize winning economist, has blamed lax regulation for the financial crisis. He said that unless there is an agency that has the sole responsibility of protecting consumers, we will not be immune from similar crises in future. [Read more…]