Volatility is the state of rapidly evaporating, vaporizing, changing or being transient. Throughout our lives we have witnessed, both personally and from afar, a plethora of volatile situations. There is volatility in people, weather, companies, environments, wildlife, countries, currencies, governments, markets, etc. Even though we have all witnessed it many times, there are times when volatility seems overwhelming. In the past couple of weeks, we have seen devastating destruction by fires in the western part of the United States. We have witnessed a financial standoff between Greece and the rest of Europe. We witnessed the horrifying murder of an on-camera reporter and cameraman. So senseless. We witnessed a week of dizzying swings in global stock markets, including in our own country.
Yes, it has been volatile on many fronts. Perhaps the last time we saw such widespread volatility was at the beginning of the Great Recession, when Congress wrestled with the creation of TARP, which never was used as intended when it passed as the Troubled Asset Relief Program. Many analysts and media talking heads have drawn parallels between our current situation and the Great Recession, yet others indicate that this time is much different. Who is right?
No one knows for sure, because humans have never shown much accuracy in predicting the future. We all get it right sometimes, and we all get it wrong other times. With that caveat, I tend to think that this time is very different than the Great Recession of just a few years ago. There are so many differences between then and now here in the United States. I am not as confident about the rest of the world.
In the United States, there are no asset bubbles like there were during the Great Recession. Housing was way out of proportion to everything else, creating a bubble that burst and led to the fracturing of most other businesses. That does not exist today. Prior to the Great Recession, the banking industry did not have nearly as much capital as it does today. Though we all thought that the banking system had adequate capital back then, it was not enough to protect against the tsunami effect of the asset bubble burst in real estate. I believe that we do have enough capital today, particularly since there does not appear to be a large asset bubble.
The underlying business climate remains solid. Businesses have lots of cash and have closely managed their companies, so that they are much more efficient and profitable than they were prior to the Great Recession. The United States is energy-independent today, for the first time in my life. While low oil prices may harm energy companies, those low prices help consumers and companies that use energy, rather than produce or sell energy. Total economy-wide, it is a positive.
My concern is the rest of the world. Greece and much of Europe have serious stability problems with government and financial systems. China and most of Asia face serious problems. We have all read about or seen televised reports of China’s over-building of cities that have no residents or businesses operating in them. That kind of foolish behavior cannot be sustained. What will be the outcome?
The Middle Eastern countries have many vast problems. Economically, their primary support product is oil. The United States will not need to buy oil, and Europe and Asia may be easing off at the same time. How will the Middle East support itself? Another problem is the escalating threat of the Islamic State group. Who will do business with those barbarians? Currently, the United States does not export oil. If that were to change, a volatile world will become much more volatile.
Whether the current volatility has peaked or worsens, the U.S. banking system remains a stabilizing constant. In Indiana alone, more than 75 banks have been in existence for more than 100 years. These banks have survived through flood, famine and drought; two World Wars, the Korean War and the Vietnam War; the horrors of overseas madmen and their ghastly regimes; and the bleakness of the Great Depression. Yet these banks survived and, more importantly, provided stability to their customers and communities. The Indiana banking community will continue to provide support to usher Hoosiers through these volatile times, and the Indiana Bankers Association will continue to support the banks that we serve.
– S. Joe DeHaven