We live in an interconnected world, both from a financial perspective and a geopolitical perspective, and it is impossible to separate those worlds. However, let me share an important lesson I learned while studying Psychology in college: Perception is reality – If you perceive it to be true, it is true to you. Therein lies the problem with the world of finance. Like watching a magic show, we cannot always believe what we perceive in financial markets.
The perception many people have is one of independent banks and monetary policies within independent sovereign states, along with separate capital and debt markets. And, there is a commonly-held belief that banking instruments have the lowest market risk when it comes to “safe” money. The truth is far from that faulty perception.
For instance, think about TARP (Troubled Asset Relief Program). President Bush and Treasury Secretary Paulsen had a choice to pay Billions to sustain the banks versus Trillions in the face of banks runs. That is not hyperbole, going over the top with scare tactics. I won’t try to cram years of research into this short discussion, but we were closer to a complete financial meltdown than most of the public and – dare I say – most financial professionals fully understand.
Watch this brief three-minute video to put TARP into perspective.
Love him or hate him, Congressman Paul Kanjorski was an insider on the House Finance Committee, witnessing what was happening virtually first hand.
Personally, I side with Ron Paul on this issue, because history shows both sides of the equation, with the results favoring the pain and quick recovery of market-driven results (1920-1921) rather than the lessened initial pain and long recovery of interventionist policies (1928-1945). Regardless, the point I want to drive home is how fragile our banking system truly is, and how its collapse potentially impacts every other component of the financial world.
Due to loose monetary policies internationally since 2008, our global monetary system has become even more perilous, as evidenced by repeated warnings by the IMF concerning unconventional monetary policy (think quantitative easing) in the days leading to the Federal Reserve Open Market Committee meetings in September.
The short version of their warnings is that we live in an interconnected world, and the Federal Reserve needs to consider how its “tapering” will adversely impact the rest of the world markets. They were flat-out frantic, and it worked. The FOMC changed course, claiming it decided not to begin tapering until some future date when the Fed’s dual mandate (inflation and employment) was better poised for reduced accommodation.
Stay tuned as I go into greater depth, exposing the real powers of influence exerting control over monetary policy, ultimately impacting the rest of the financial world.