Monday, June 20, 2011

The Fed is raising risk premia?

The higher equity risk premium does not only discourage investment in general, it also favours sectors in the economy that are characterised by relatively high debt-to-equity ratios (e.g. the financial sector). It may explain why – by the mid-2000s – bank profits accounted for 40% of S&P 500 companies’ profits combined. The “financialisation” of the economy is often attributed to deregulation. However, the combination of low bond yields and high equity risk premiums, which favoured the banks disproportionately, contributed to the financialisation as well.Heleen Mees
The argument is that in the early 2000s, emerging markets did not have access to good equity investments, and plowed their savings back into fixed income assets. Hence:
The higher equity risk premium does not only discourage investment in general, it also favours sectors in the economy that are characterised by relatively high debt-to-equity ratios (e.g. the financial sector). It may explain why – by the mid-2000s – bank profits accounted for 40% of S&P 500 companies’ profits combined.
In other words, with easy money and arbitrage, corporations mainly traded paper. There is however a deeper issue. With energy shortages, corporation found no way to make money with high input prices. Corporations bet on the Socialist Banking Industry, supported by Congress and lil Bush. So, yes, the crash can be blamed on Bush and the Red State Welfare problem.

No comments: