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    Home»Kuo’s Smart Take»Smart Thought Of The Week: Systemic
    Kuo’s Smart Take

    Smart Thought Of The Week: Systemic

    David KuoBy David KuoMarch 19, 2023Updated:March 19, 20233 Mins Read
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    The term “systemic” is thrown around with gay abandon these days. Everything, it seems, can somehow be classified as systemic. Put another way, some people like to argue that a bad event in one part of a system can have a profound impact on the entire organ.

    It is taking Lorenz’s butterfly affect from the sublime to the ridiculous. A butterfly flapping its wings in Brazil does not cause a tornado in Texas, figuratively, alliteratively, or practically. It might be a colourful way to describe the perils of weather forecasting. But it is dangerous when we start to draw parallels with the finance industry.

    But that hasn’t stopped commentators from warning that the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank and for that matter, Credit Suisse, could infect the entire banking system. Whatever happened to everyone taking responsibility for their own actions? It certainly raises the issue of moral hazard or taking excessive risk because we believe that someone will always have our backs.

    Let’s be clear, though. Fraud needs to be punished. Incompetence needs to be penalised. Bad management needs to be called out. But to venture down the moral hazard road without considering the consequences is a dangerous journey that could lead to financial chaos. It means that we can all choose to throw caution to the wind in the knowledge that our risk-taking will always be covered. That is not how capitalism is supposed to work.

    There is always a cost attached to moral hazard. Someone somewhere is footing the bill for someone else’s irresponsible behaviour. In the case of bank bail outs, we are effectively endorsing zombie financial institutions at the expense of those that are both healthy and profitable. How does that make any sense?

    We can only hope that the rate-setting committee at the US Federal Reserve can manage to keep its eye on the ball this week and stay true to its pledge to bring down inflation. Inflation is a cost and a risk to our future financial well-being.

    I hope, but I am not convinced, that the Fed will vote to do the right thing. So, I am ensuring that my pension pot keeps pace with inflation, with or without its help.

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    Disclosure: David Kuo does not own any of the shares mentioned.

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