Has monetary policy turned us into risk takers?

In March 2008, Bear Sterns failed and was taken over by JP Morgan. A few months later, Lehman Brothers, the fourth biggest investment bank in the United States, went bust too. And the rest is history as the world experienced the worst recession since the Great Depression.

To avoid the collapse of the financial markets, the US Federal Reserve started buying mortgage backed securities. By June 2010, the Fed owned $2.1 trillion of bank debt and securities. This buying of debt, known as Quantative Easing, continued with other rounds later in 2010, and again in 2012. The ECB were slower to react with QE, commencing in May 2009 but not admitting it was doing so until 2015. Other Central Banks around the world did similar things and our own government created Nama to buy all the debt off the banks to keep them solvent.

Fast forward to 2020 and Covid 19 shutting down the global economy. Central Banks were a lot quicker to react this time pumping trillions into the economy to keep companies solvent and to provide governments with cheap sources of money to fight the virus.

Let companies go bust

From an investor point of view, has Central Bank interventions made us into risk takers as investors? The share price of cruise ship company, Carnival, fell from $51.90 to $8.49. Despite the company being shut down and having no source of income until it was safe again to sail, people saw this as a great buying opportunity. Airlines are another example of companies that took billions in bailouts to keep solvent.

Should these companies have been allowed to go bust? Yes, they should have. Carnival or American Airlines aren’t too big to fail. If they went bust, someone would have bought them and cut away the fat, making them more efficient companies. Instead, we got CEOs of these companies getting compensation in cheap stock which resulted in them getting paid tens of millions of dollars for presiding over their companies worst periods while their staff were let go.

Safety Net

The 2008 crash, showed us that holding a diversified portfolio of quality stocks will yield positive returns if held over the long term, no matter what happens during that term. But has constant central bank intervention since then provided companies and investors with a safety net when it comes to making decisions? The benefit of a safety net is that you can take risks that you normally wouldn’t as you know that if it doesn’t work, you will be fine. This is not a good way to run a business. From an investor point of view, it allows investors to take even bigger risks in search for those big rewards.

We learn from our mistakes but if there are no consequences to making mistakes, will you learn at all?


Steven Barrett

28 June 2021