Short Lived Economic Pessimism: Pollyanna is Back - With a Vengeance

by: Michael Panzner

Last month, regulators highlighted serious concerns about excessive risk-taking in financial markets, unsustainable financial imbalances, and the threat of a systemic crisis. However, three recent reports suggest that Pollyanna is back -- with a vengeance -- in regulatory circles.

In "EU Says No Extra Private Equity Rules Needed," Reuters reports that Europe's Internal Market Commissioner sees little to worry about when it comes to today's masters of the financial universe.

Private equity funds keep company bosses on their toes and generate strong returns for investors, the European Union's top financial regulator said on Thursday, ruling out the need for extra supervision....

"I believe that private equity houses and activist fund managers of all kinds -- including hedge funds -- play a much more valuable role than any government or any regulator in propelling the liquidity of our capital markets, in reducing the cost of capital," he said in a copy of a speech to be given at an industry event in Dublin later on Thursday....

"I have no intention whatever of trying to change the nappies of either banking supervisors, the financial institutions that they supervise, or of the professional investors who invest in them," [Charlie] McCreevy said.

"I will be watching to see how the existing regulatory framework affecting private equity funds is enforced. But I have no proposals to add to that framework aside perhaps from facilitating the creation of a pan-European private placement framework," McCreevy said.

Warnings of defaults were not misplaced, he said.

"But nor do I shiver at the prospects of such default because it will be precisely when a major default does occur ... that markets will adjust, amateurs will get driven out, and sound and sensible banking principles will be restored," he said.

"Fools get parted from their money. And fools posing as professionals as well as professionals behaving like fools - deserve to be parted from their money," McCreevy added.

Of course, if enough of these so-called fools happen to get nailed at once, then there are likely to be many innocent victims who will also suffer the consequences.

In "Federal Reserve's Yellen Is Sleeping Better," MarketWatch reports that another regulator is feeling rather sanguine, too, though it's hard to see why.

Janet Yellen, president of the Federal Reserve Bank of San Francisco, is sleeping better than she was a year ago, thanks to signs of stabilization in the housing market.

Still, her slumber is occasionally disturbed by worries about inflation, she said after a speech in Santa Clara, Calif. on Wednesday.

Last year, when it looked like the housing downturn could turn into a bust that risked tipping the broader economy into recession, Yellen said she found it more difficult to sleep.

But Yellen said she has noted recent signs of stabilization in the housing market and slim evidence that housing's slowdown has spilled into other parts of the economy.

"I'm waking up less at night than I was," she said. "So far, there's been remarkably little effect on the rest of the economy."

I wonder, where exactly is that stabilization she is referring to? I'm sure the homebuilder Toll Brothers (NYSE:TOL), which recently warned about the outlook for its business, would love to know.

In "U.S. Says Hedge Fund Regulation Is `Working Well'," a diverse group of regulators also sees little to worry about in regard to operators whose activities increasingly play a dominant role in a variety of opaque, lightly regulated, and risky markets.

A U.S. presidential panel said the current system of hedge-fund regulation is "working well" and market discipline remains the best way to protect investors and guard against risks to the financial system.

The panel, led by Treasury Secretary Henry Paulson and including his counterparts at the U.S. Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission, said in guidelines released today that the responsibility of maintaining discipline falls on hedge-fund managers, investors, creditors, trading partners and market regulators.

Those who would believe that the role of regulators is to guard against any losses or somehow prevent losses or to prevent a hedge fund from having problems, they have a different philosophy about regulation than I do," Paulson said in an interview.

The report by the President's Working Group on Financial Markets, which Paulson called the "unified perspective" of U.S. regulators, makes no recommendations for new government regulation. It follows the failure last September of Amaranth Advisors LLC, a Greenwich, Connecticut-based hedge fund that lost $6.6 billion on natural-gas trades. Hedge funds manage an estimated $1.4 trillion in assets....

While hedge funds "bring significant benefits" to the financial markets, Paulson said in the interview "there is no doubt they give rise to certain challenges," including the trading of derivatives outside stock exchanges.

Hopefully, these remarks are merely a bit of regulatory "sweet talk" to reassure investors and the public that things are under control. If not, then we've really got a lot to worry about right now.