Monday, September 22, 2008

Political Risk

In addition to the potential random and kick-em-when-they're-down shocks I discussed in yesterday's post, we also face tremendous political risk. 2008 is starting to look eerily similar to 1932 -- an unpopular Republican president in office, a pending election, and a financial crisis that won't go away. The threat before the election is that both parties will try to use the crisis to score political points. The threat after it, especially if the Democratic candidate wins as in 1932, is that the Republicans will sit on their hands while the minds of market participants race wondering what the incoming administration will do.

The good news is that the new president will be inaugurated in late January instead of early March. The bad news is that the world moves much faster now so late January is still a very long way away indeed. In early 1933, the payments system actually broke down just before FDR took office. You can't imagine what chaos that would cause today ... credit cards would stop working, ATMs would run dry, and Americans would learn the dirty little secret that their bank deposits are not convertible into Federal Reserve Notes on demand. Banks will exchange deposits for cash when it's convenient but they don't have to do it and in fact holding nothing close to enough vault cash to meet even a modest run. Let's hope it doesn't come to this but it would behoove policymakers to consider the possibility. We don't need a financial Katrina.

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