Expansion of economic activity in the U.S. began nearly eight years ago in July 2009. Expansions do not die simply of old age. They turn into recessions when the economy overheats. Markets usually tend to be myopic and underestimate the presence of recession-inducing excesses and, thus, are surprised when recession occurs. Today, there does not appear to be any single highly visible imbalance to interrupt the steady upward march of economic activity. However, when the economy is operating at full employment and the Federal Reserve is engaged in tightening monetary policy, risks inevitably build. In this month’s letter, Bill Longbrake examines risks – “yellow flags” – which, in addition to tightening monetary policy, are present in the U.S. economy and deserve attention and monitoring. Read the full letter.
Optimism and hope continue to reign that the U.S. economy will strengthen, but some doubts are beginning to surface. Hard economic data have been mixed. Political turbulence and daily drama in Washington may delay or sidetrack tax reform and infrastructure spending. In this month’s letter, Bill Longbrake examines the long-term potential rate of real GDP growth and explains why the lackluster 1.7 to 2.0 percent annual growth expectation may turn out to be overly optimistic. He also discusses why the labor market might not be as tight as most believe, why inflation might not reach the Fed’s 2 percent target, and why annual wage growth may top out at less than 3.35 percent. In Bill’s discussion of monetary policy, he muses about whether the Fed is “behind” or “ahead of the curve,” and explains possible approaches to reducing the Fed’s bloated balance sheet. Read the full letter.
Regulation has a vital role in any financial system—and changes to U.S. financial regulation were clearly needed in the wake of the financial crisis. However, in a constantly evolving economy, discussion over the proper calibration of financial regulation should never really stop. Because banking and other financial services cannot be entirely de-risked, at least not without losing the benefits that we as a society expect from the financial sector, completely eliminating risk is not a plausible goal of regulation. Banks and other financial intermediaries need to take on risk to support a growing and dynamic economic engine. Download the full report here.
A perennial question for risk managers in any industry is how to better anticipate and react to potential risks before they can turn into something more serious over time. With markets, customer behavior and technology becoming increasingly dynamic and complex, the cognitive skills needed to adapt quickly to subtle but important changes are every bit as important as the analytic tools used to measure risk.
To better balance the “science” of risk management, greater attention much be made in cultivating the “art” of our profession — and this is where practicing situational risk awareness (SRA) can make a difference in your organization. Read Professor of the Practice Cliff Rossi’s full column here
by Phillip Swagel, CFP Academic Thought Leader and Senior Policy Advisor, Susan Gates and Ann Schnare
It is a hopeful sign that Treasury Secretary Steven Mnuchin has raised privatization of Fannie Mae and Freddie Mac as an early order of business for the new administration. The red ink that poured out of the two companies during the financial crisis has long stopped flowing, but Fannie and Freddie remain in the government-controlled limbo of conservatorship they entered in September 2008. This leaves a situation in which government domination of the housing finance system puts taxpayers on the hook in the event of serious problems, even while many families find it difficult to obtain a mortgage. With the two government-sponsored enterprises (GSEs) still the linchpins of the mortgage system, taxpayer money surely would be used to prop them up again in the event of a future housing downturn. Hence, it is understandable that Mr. Mnuchin would like to privatize the entities as soon as possible, both to reduce taxpayer risk and to improve the effectiveness of the mortgage system at ensuring access to financing for families looking to buy homes.