Leone’s Money Monitor Monthly for the Month of June 2012

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After the reported loss by J P Morgan Chase last month, there is much interest in the workings of the Dodd-Frank Wall Street Reform and Consumer Protection Act which places regulations on the financial industry to prevent collapse of their institutions and protect consumers from abusive lending practices. The legislation establishes the Financial Stability Oversight Council which monitors the banking industry and hedge funds. This council through the Federal Reserve can increase the reserve requirement for banks if risk is identified, require banks to have a shutdown plan in the event of insolvency and break up banks that are too large. It appears to me that increases in reserve requirements has placed a burden on small banks which is forcing them into merger and buy out arrangements creating larger banks. The Volker Rule, when in place, will prohibit banks from owning, investing, or sponsoring hedge funds, private equity funds or any proprietary trading operations for their own profit. This is likely a flash back to the intent of the Glass Steagall Act which was rescinded in the 1990s. Derivative trades will have to be more transparent and transacted in public through a clearing house or formal trading exchange. This legislation will also monitor insurance companies to identify risk of default. Rating agencies such as Moody’s and Standard & Poor’s will have to submit their rating systems for review by the SEC. Much of the regulatory function is still in the draft phase. Who knows where this will lead. Is it too much or too little in the effort to prevent another crisis such as the one we experienced in 2008?

According to CNBC.com, banks are being pressured to buy government debt in Europe. Regulators are allowing banks to escape counting government debt against capital requirements. What will happen if one or more of these sovereign governments cannot meet their debt service obligations?

There has been much rhetoric in the media over the influence that speculators are having over commodity pricing such as with oil. We must take a step back to our knowledge of economics 101 to make some sense of this issue. The concept of scarcity tells us that there is limited ability to meet unlimited wants. Therefore choices must be made. We use the market system to do this. The dynamics of supply and demand set price levels. People will make choices based on cost and expected benefit to them. Highest benefit for least cost is the nature of the incentive for chosing. It must be clear to everyone that there are individuals on both sides of a speculative encounter. Some will speculate that prices will rise while others will speculate that prices will fall. One or the other will win sometime and lose sometimes. It is supply and demand which set prices in the market system.

While we are discussing economics, it may be interesting to examine the concept of the Fiscal Cliff which is being presented in the media. This issue regards the 2013 tax increases and spending cuts which the US government will impose automatically if the Congress does not take any action. The concern is that this dynamic will cause GDP growth to contract signficantly causing another recession. This soap opera will unfold slowly in my opinion. We may not see any movement on the associated issues until after the election in November.

For the Record:

DJIA 12,118.57

NASDAQ 2,747.48

S&P 500 1,278.04

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