Three Yards and A Cloud of Dust

I sincerely hope against hope that the Dodd-Frank "financial reform" bill dies without a signature. The financial industry has not become smaller, but more concentrated, and the big players, like JP Morgan and Citicorp, are still "too big to fail." The mortgage markets are now dominated more than ever, by Fannie and Freddie, the two culprits that led us into this mess, spurred on by legislators like Barney Frank.

Derivatives trading may become marginally more transparent in its smaller segments, but nothing of significance has changed here either, since this lucrative activity has not been separated from commercial and traditional investment banking.

So, where is the next crisis likely to emerge? The 1970's saw the old U.S. Bank almost brought to its knees by developing country debt, from countries like Argentina if I recall. The next boom in asset prices is and will likely continue to be in emerging markets. China has been dealing quietly with its real estate issues, and Indian properties have long been in a gold rush mode. Properties in Central and Latin America are drawing corporate and individual speculators. There is lots of money to be made, and lots of systemic risk to be generated in these emerging markets.

Interbank lending still seems to be frozen, and small businesses cannot get traditional C&I loans from banks or larger credit unions. If these businesses are the ones that generate employment growth, then this is not a good sign going forward.

There is an economic argument which says the demand for monetary assets will outstrip the demand for goods and services, and so the near-term risk is deflationary. That is what some of the markets are signalling. However, the longer-term response to the sovereign debt issue is on the inflationary side. Again, this is a trader's dream, but a nightmare for the citizen, small investor, and policy maker.