Market Perspective: It’s Not the Knowns, it’s the Unknowns that Worry You

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The Federal Reserve finally commenced monetary tightening in December, raising the federal funds target rate for the first time in nine years. The nation’s central bank believes the economy is back on track following the slowest economic recovery post-World War II—but are we taking all the proper precautions to prevent another financial crisis similar to the one the nation experienced in 2007-08?

The government and policymakers put in some safeguards—but it’s the unknown that we need to worry about, according to Bankrate.com Senior Economic Analyst Mark Hamrick.

“I would make an analogy about financial crises and boxing,” Hamrick said. “The punch that a boxer is most worried about is the one that he doesn’t see coming. Essentially, the same thing has to do with the risk in the global economy and financial markets.”

The 2007-08 crisis was unique because it was the participation of many different types of stakeholders that allowed it to happen, Hamrick said, ranging from politicians to were not vigilant about promoting regulation to politicians who promoted the idea that everyone who wants to own a home should be able to own one, as well as financial markets that encouraged the securitization of mortgages.

“I think it’s appropriate for regulators, central bankers, elected officials, people in industry, consumers, and investors, to have an idea about what the appropriate risks are and obviously for certain regulators in the United States to be taking all measures possible to try to guard against the next financial crisis,” Hamrick said. “But history tells us that what we tend to see is that regulators try to stop the repeat of the most recent financial crisis instead of have an ability to essentially be omniscient to stop all potential financial crises. These could be things that we just right now could not possibly anticipate.”

Possible causes for concern that cannot be fully anticipated range from concern over China’s economy, a large scale war or natural disaster, an accident of some kind, something technical in the financial markets, or even a compromise of financial markets by hackers, Hamrick said, but could include virtually anything. The Financial Stability Oversight Council (FSOC), which was created out of the Dodd-Frank Wall Street Reform Act of 2010, has addressed some of the causes of the crisis, “but the concern is that what we don’t know is what’s going to hurt us,” Hamrick said. “We know that we’ve tackled some of the problems that occurred last time around, but it’s the problems we haven’t quite defined yet that are probably the most worrisome.”

 

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