Leading Banking Analyst Cautions Investors During Downtrend

Unless buying materialises,says Richard X. Bove,vice president of equity research at Rafferty Capital,LLC in a note to investors,there is nothing to stop a massive move to the downside due to the lack of liquidity in the markets.At this moment,I would strongly caution to remain on the sidelines until a definable source of new funding is determined to maintain or bolster stock prices.
At its base,the key problem is that the historic protections that once existed in the markets to prevent massive downslides have been removed.This country's claim that it has deep and liquid markets is being put to the test.*
Mr.Bove is bitterly critical of the plethora of new regulations that have been imposed on the banking industry post-financial crisis.These include the US Congress passing the Dodd-Frank Act;Basel III,Supplementary Leverage Ratio;Liquidity Coverage Ratio;and the Orderly Liquidation Authority;and the Total Loss-Absorbing Capital Regulation.The impact of these regulations,rules and pieces of legislation has been the complete takeover of the banking industry by the government.In my view,the industry has been effectively nationalised,Dick Bove said in a December 2014 interview,in which he also predicted that banking industry regulations would limit the earnings of banks in the long term.It is these regulations that have also ultimately restricted the flow of funds to the point of making the markets vulnerable to collapse.

When Employment Will Really Improve

Ethan Harris,chief North American economist at Bank of America/Merrill Lynch,thinks the best we can hope for is mid-2011.A pick-up in jobs is linked to clarity on tax and regulatory policy.He wouldn't expect agreement on those matters until the end of 2010 or January 2011.
The economy remains in a growth recession,and uncertainty is the enemy of growth.The Federal Reserve is using weaker and weaker tools,but it doesn't mean they're going to give up.
The market has been a bit overexcited about the election.If they just keep fighting with each other,that's not good for the economy.It's a bipartisan nastiness,Mr.Harris observed.
The economy added 151,000 jobs in October-the first increase since April,but the unemployment rate remains at 9.6%.At that rate of job creation,it will take seven years for the labor market to recover.
Bank of America/Merrill Lynch(BAC)

Professor Supports Financial Reforms

The worst financial crisis since the Great Depression of the 1930s has ignited a big reform process.The proposed reforms would grant significant new powers to the Federal Reserve and the Treasury Department.They would touch every aspect of the financial services industry.The Federal Reserve would be in charge of systemically important firms,which would have to hold more money in reserves to cover losses.There would be supervision of derivatives.Consumer financial protection would be provided by a new agency.Laura Tyson,a professor at the UC Berkeley Haas School of Business,says she thinks the proposed reforms would addree many of the sources of the financial trouble in the world.They actually fill gaps and address systemically important institutions,whether banks or non-banks.I agree that consumer products and financial services are increasingly difficult to understand,Dr.Tyson said.One of the things we have learned is there are institutions taht pose systemic risk.Having a person who supervises them makes sense.The Federal Reserve and Treasury have been working together in this crisis.You're gonna have to have this kind of partnership,Dr.Tyson feels.

Focus on Regulatory Reform:The Financial Future

A lot of concern centers on the proposed granting of powers to the Federal Reserve for the monitoring and control of systemic risk.The Fed would have to get Treasury Department approval for spending large amounts of money during crises.At such a time,although Treasury is involved,it is very important that the Federal Reserve preserve its independence and accountability for price stability and stable growth,Treasury Secretary Timothy Geithner told the Senate Banking Committee last week.Central banks around the world have traditionally policed systemic risk.Proposed changes to the Fed's role are modest.The Fed chairman would still be accountable to Congress.Our solutions focus on the central causes of the financial crisis.Conservative constraints on risk-taking will mitigate the too big to fail hazard.There is no conflict between the Fed conducting monetary policy and policing systemic risks,Mr.Geithner said.
A lot of things contributed to this crisis,Mr.Geithner explained.Future crises will require a study of how macroeconomic policy contributed to them.We need to be realistic in recognizing how difficult it will be to anticipate future risks.The critical failure of policy was in not imposing constriction on leverage in the good times.The Fed has a better feel for financial markets than any other government entity.
We're still in the midst of a challenging recession on a global scale,and we want to be able to respond to future risks,so Treasury should retain any money repaid to it by financial institutions,Mr.Geithner asserted at the Senate hearing,wearing a charcoal suit,white shirt and burgundy tie.He seems to be gaining the respect even of Republicans who doubted his suitability for his position.The gravity of the reform process was clearly evident in the atmosphere of the hearing.You could feel the weight of the occasion on everyone's shoulders.Would the Federal Reserve lose its independence under the reforms,or would the Fed be too powerful? No one wants to disturb the delicate balance of the financial regulatory bodies,but the wheels of government are rolling down this path of reform,and there doesn't seem there is any chance of stopping them.