Editor’s Letter : A Question Of Trust

Dear Reader

At its core, the entire global financial system operates on the basis of trust. Almost every financial transaction depends on it, and without that trust those transactions simply would not take place. Over the past 18 months we have seen that core component of the global system erode and, in some areas, disappear completely, plunging the global economy into something that looks very much like a crisis.

In times of crisis, you want someone in charge who really knows what theyre doing. With the United States seemingly on the verge of the worst economic meltdown since the Great Depression, who better to have at the helm of the Federal Reserve than Ben Bernanke, a renowned scholar of that awful event? But wait a minute: If Bernanke hadnt been a scholar of the Great Depression, its entirely possible he would have acted differently and that the hiccup of the subprime fiasco in 2007 would have remained just that, instead of turning into the trigger for the greatest, farthest-reaching and probably most expensive financial meltdown the world has ever seen.

Bernanke, by helicoptering in a giant bail-out, before what we now call the credit crunch had even begun, created an atmosphere of panic that undermined many peoples confidence in the markets and, arguably, sowed the seeds that grew into the credit crisis. With trust deserting the market, participants began to focus on risk. Lenders stopped lending, and investors rushed to cash in their chips. Investments that had been perceived as relatively low risk suddenly became much, much scarier. Its hardly surprising that in such an environment fear became the dominant force. And with its recent decision to dump seemingly infinite liquidity into the system while slashing interest rates to effectively zero, the Fed is only feeding that underlying fear.

Bernanke and his peers at the other major central banks can hardly be held entirely responsible for the mess that the financial world has found itself in, of course. The banks made some atrocious decisions, and corporations, institutions and individuals alike stopped taking risk seriously. Entirely predictably, they paid a high price for their complacency.

Amid all the turmoil, however, there is a ray of hope. As we look ahead to the coming year, we do it with the confidence that the global financial system has been through a thorough shake-out and that, once the trust returns, it should be stronger, more stable and, hopefully, wiser than ever.

Until next month,

Dan Keeler