Solid reasons for optimism within the current market

Very large banks have failed, and others have been saved from collapse only by an enormous infusion of federal funds. Even in the wake of the global crisis, smaller commercial banks in the U.S. continue to fail, though not at a rapid rate or in large numbers — yet. The vast crisis has been mitigated, but serious dangers remain.

Yet stabilization has been achieved, and we are moving toward effective reform. Other governments and international institutions have engaged in an enormous rescue effort. Politicians and central bankers in this country and others have acted decisively to stabilize — and ultimately save — the global system, even at the cost of sometimes severe public backlash for “bailing out” irresponsible bankers.

The G-20 major nations have acted effectively to coordinate national policies, banks are being more strictly regulated, and their capital requirements have been raised simultaneously with their rescue. This process continues even as the worst of the global crisis has waned. The Congress is wrestling with comprehensive banking reform legislation, including the very important initiative of Paul Volcker strictly to separate commercial from investment banking.

Yet popular media, in typical fashion, often minimize these developments. As usual, bad news has driven out good. The alarmed voices of TV commentators provide the contemporary counterpart of tabloid scare headlines. This tone reinforces public fear.

In evaluating these and future developments, citizens and savers must remember the basic truth that authentic free markets go down as well as up. Markets can be inefficient, irrational, manipulated and badly regulated.

By definition, however, they reflect basic realities, including public psychology. The growth of an extremely complicated global financial derivatives market greatly expanded possibilities for financial mischief as well as loss. Derivatives have become engines of risk creation as well as risk management.

Individual home loans traditionally based at local banks have been packaged into big bundles of bonds and other debt instruments, peddled literally around the globe. The scale and complexity of these arrangements mean that small individual loan defaults are much less likely to be noticed quickly.

During the Great Depression — a far, far worse crisis than today — American humorist Will Rogers became enormously popular because of timing as well as wit. His homespun rural style provided a self-conscious contrast with the East Coast big-city financiers blamed for the nation's economic problems.

Inspired by Will Rogers, here are three direct down-to-earth points.

First, as a worker, take pride. The United States — you and me — has the most productive and largest economy in the world. Our gross national product now totals well above US$13 trillion.

Second, as a citizen, be active and alert. Current initiatives directly reflect very strong public concern, indeed fear. There must be serious, sustained government oversight of financial activities. Current reform efforts are promising, but only a start.

Third, as an investor, do homework. A good guide is “Security Analysis” by Benjamin Graham and David Dodd, first published in 1934 during the Great Depression, revised and republished regularly since. You can even read the book while the TV is on.

Arthur I. Cyr is Clausen Distinguished Professor at Carthage College and author of 'After the Cold War' (NYU Press and Palgrave/Macmillan). He can be reached at acyr@carthage.edu

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