Pub. 3 2015 Issue 1

21 Spring 2015 The Community Banker R isk taking is the life blood of a free market economy. Since America’s colonial days fortunes have been made and lost by those who put their own money on the line in hopes of making more money. Our very history is one of free enter- prise and risk taking. Alongside those pilgrims who came to the “desolate wilderness,” itself a risky venture, came the busi- nessmen and speculators. There is no arguing that this country’s prosperity and success is direct- ly tied to a free market econom- ic system which encourages risk taking. However, free market econo- mies have ups and downs, and are in fact prone to speculative bubbles. Success does not travel in a straight line. There will be failures and excesses, and money will be lost. It is the free market’s way of ensuring that in the long-term money and resources are allocated efficient- ly. In economic terms it is called “creative destruction.” If you believe in the free market’s ability to effectively allocate resources and the forces of creative destruction, you might find some concern with the current state of things. It’s possible that there just might be a few financial bubbles around, and it is possible that those bubbles might not be the natural result of the free market risk taking, but might be, best intentions aside, government policy induced. During and following the mortgage and financial crisis of 2007-2008 and the “Great Re- cession,” there was a lack of risk taking. Both households and business were actively trying to repair their balance sheets, and home prices were falling in many parts of the country as the result of the bursting of the housing bubble. In 2009, the Federal Reserve came up with a grand plan to turn the economy around by encouraging risk taking and putting a floor under home prices. The plan has an official name. As announced in 2009, by Ben Bernanke, the Chairman of the Federal Reserve at the time, it is called the portfolio balance channel strategy. This official strategy was to drive the returns on relatively safe assets such as US Treasury bonds so low that yield seeking investors were forced out the risk curve into other higher yielding, but riskier assets. To implement the strategy, the Federal Reserve purchased huge sums of US Treasury bonds and mortgage-backed securi- ties; this part of the strategy was known as quantitative easing. The Federal Reserve also set the Federal Funds rate, a benchmark short-term interest rate, near zero. In lowering both long-term and short-term interest rates the Federal Reserve hoped to create an environment of increased lending, borrowing, and risk taking, and to put a floor under sliding home prices. It was a grand experiment, and it is still on-going. Giv- en the current level of stock markets globally versus their levels when the Federal Reserve implemented their strategy, one might conclude that the Federal Reserve has been successful in encouraging risk taking. One might also consider other places money has flowed such as commodity produc- tion. The world is now awash in raw materials as the price of everything from oil to lumber is falling. Bonds themselves might also be a bubble as yields and interest rates remain at historical lows in the United States, and are negative in many European countries. The problem with bubbles is that markets are never con- vinced it’s a bubble until it pops. The bottom line is that risk taking is a necessary and good thing in a free market economy. It drives investment and spend- ing which drive productivity and economic growth. But the question is; can risk taking be induced by central bank policy? Or have the policies of the Fed- eral Reserve and their counter- part central banks around the world lead to mal-investment, the inefficient allocation of money and resources, and asset price bubbles? It’s not a question that can yet be answered. Only time will tell. In conclusion, history has proven that the occasional speculative bubbles of a market economy lead to pain for some, but a more efficient economy going forward as the process of creative destruction takes place. Here’s hoping that the policies of the U.S. Federal Reserve and other central banks around the world are promoting productive risk taking and not short-term gain at the expense of longer term pain. Best intentions aside of course. Barry Nielsen has worked in capital markets for over 20 years with a focus on fixed income portfolio and risk management. He has an MBA from George Mason University and holds the Chartered Financial Analyst designation. He currently works for Oppor- tunity Bank of Montana. SPECULATIVE MANIA By Barry Nielsen, Opportunity Bank of Montana Guest Article ICBA Chairman John Buhrmaster passed the torch to incoming ICBA Chairman Jack Hartings, who will be joining us this summer for our 2015 MIB Convention. We thank Mr. Buhrmaster for his excellent year of service as ICBA Chairman, and we welcome Mr. Hartings and wish him all the best in his new position. We also thank Cam Fine for his years of tireless advocacy on behalf of community banking—our best hope to reduce the crippling burden of federal regulations. ICBPAC raised $515,000 for lobbying efforts from the Silent Auction Fundraiser, which included a number of distinct hand-crafted items donated by Montana bankers. MIB hosted our annual reception for Montana delegates on the evening of Monday, March 2. It was a great time of getting away from the hoards to enjoy an intimate evening of drinks, appetizers, and warm conversation with old Montana friends. We were glad to have a number of ICBA officers and staff and MIB associate mem- bers join us, as they never fail to add to the camaraderie. This was the first year we invited sponsorship for our reception, and United Bankers’ Bank, ICBA Securities, and Young & Associates each contributed to make our reception a success. Many of our Montana delegates said Gaylord Palms was the most enjoyable and family-friendly venue they had experienced at a con- vention. Next year’s ICBA convention will be in New Orleans, which will be another fantastic location. We hope to see you there!