Musicwhiz Portfolio
I guess the most earth-shattering piece of news this month is the announcement by American President Obama about new controls over banks and what they can do. On January 22, 2010, he proposed that commercial banks be prohibited from entering the investment business; and to just stick to what banks do best – provide loans and earning money from loans and interest. Basically, this is the concept of the “old-fashioned bank” and seeks to move backwards in terms of banks’ allowable activities and roles. This has similarities with the Glass Steagall Act enacted in 1933 as a result of the Great Depression, and was a direct legislative measure in response to the failure of 5,000 banks during that harrowing period. In addition, he mentions 2 additional reforms – that of ensuring that banks (which received taxpayer-insured deposits), are not allowed to put such monies at risk by operating hedge funds and private equity funds; and to prevent big banks from further merging and consolidating till America is left with just a “few super large banks”, which will NOT benefit the average American. Of course, the markets did not take to his comments very well and a savage sell-down ensued, with the DJIA falling over 500 points in just 3 days.
In addition to this (apparently) ground-breaking news, news also trickled in about China’s economy growing 10.7% year-on-year for 4Q 2009; and its December 2009 inflation jumped to 1.9% from a negative inflation last July, while bank lending rose sharply as well. All these pointed to China possibly over-heating as its GDP growth for FY 2009 hit 8.7% (some websites report a “revised” figure of 8.2%), which for any nation is considered breakneck growth. China has begun the task of reining in runaway lending by banks, by hiking the reserve ratio and also directly telling banks to freeze lending. Of course, all these measures had the knock-on effect of providing yet more jitters to the stock markets as everyone got worried that the economic recovery after the Great Recession would grind to a halt. So instinct and emotion took over and caused the selling to intensify, especially in Asian markets as well. Read more…
