Markets Remain Volatile as World Leaders Seek Solutions to Global Financial Crisis
Many investors, brokers, analysts and others who make a living from the U.S. stock markets have all but given up trying to understand why markets are remaining as volatile as they are and have resigned themselves to expect the unexpected as each new trading day dawns. While the reasons behind the current global financial crisis are no doubt many and varied, it would seem that fear is one of the key factors behind the ups-and-downs of the market, and the problem with fear is that it is by nature irrational.
With no quick-fix solution in sight, should investors just allow themselves to be tossed about on the stormy seas of the stock market? Some investors have resolved to hold on tight in anticipation that, sooner or later, the market will improve and their stocks will regain their value. Others are bailing out as fast as they can, somewhat like rats leaving the sinking ship. Then there are those who are seizing the opportunity to buy up undervalued stocks – Warren Buffet-style – confident that the market will stabilize in the not too distant future and their daring investment strategy will be richly rewarded. However, the average investor does not have the luxury of excess funds at their fingertips, and when they see their nest egg dwindling it is understandable that panic may set in, especially as authorities do not seem to be able to pinpoint exactly what went wrong, how to rectify the situation, and how to prevent it from happening in the future. So, in effect, the market is primarily being driven by fearful investors with a short-term perspective.
In a prepared statement delivered on Thursday to the House of Representatives Oversight and Reform Committee, former head of the U.S. Federal Reserve, Alan Greenspan, described the U.S. as being “in the midst of a credit tsunami”. However, having said that, he also expressed his confidence that the country will emerge from the current crisis with a “far sounder financial system”. Some analysts lay a large portion of blame for the financial crisis at the feet of Greenspan, saying that he failed to control financial institutions during his two decades of heading up the Fed (1987-2006). While admitting that he still doesn’t understand how the credit crunch and spreading financial crisis occurred, Greenspan conceded that he made the mistake of presuming that lenders were better equipped than regulators to protect and manage their personal finances.
With plenty of finger-pointing going on as to who is to blame, leaders are pulling out all the stops in an effort to contain the crisis, calling for tougher internationally co-coordinated measures to prevent a reoccurrence in the future. The two-day Asia-Europe summit opening Friday in Beijing will see representatives from 43 nations discussing the global financial turmoil. It is anticipated that the summit will result in a unified response to the crisis in preparation for the G20 summit to be hosted by U.S. President George W. Bush in Washington on 15 November.
While attention is being focused on reforming the global financial system, it would seem that it was not so much the current financial system that was at fault, but rather the fact that it was not strictly adhered to. If that is the case, then any new system put in place is at risk if not adhered to, proving the old adage true that a chain is, in fact, only as strong as its weakest link.