Investing and Uncertainty: A Perspective On Current Economic Policy

By Joshua Caucutt (Staff Writer), on January 28, 2010

Economies develop and move forward under almost any conditions. Mankind can adapt, survive and even make a living in the totalitarian economies of Chavez and Castro to the laissez-faire, free market economies of Canada and Hong Kong. In a manner of speaking, free market is alive and well wherever people live. Sometimes it is a black market or a non-currency market — markets exist in prison for that matter. The point is, if the rules stay constant, people are creative enough to make a profit or at least survive.

The one factor that restricts a market the most is uncertainty.

Photo by artemuestra via Flickr

News came out last week that President Obama is proposing new rules for banks. The rules are a combination of taxes, fees, limits, and accountability.   Many of the rules and regulations make sense, we do need more oversight and law enforcement in some areas of the market – provided that the government does not meddle in that market. Fortunately, all of the new regulations must be approved by Congress before being put into practice, which is a good thing, even though congressional approval certainly adds another level of uncertainty to the future.

The issue is that the administration seems to come out with new statements on banking or business every week. Obama’s administrative policy proposals resulted in a huge sell-off of the big banks last Friday and these stocks are recovering slowly at best. Yesterday, the administration proposed requiring small businesses to set up IRA’s for employees. Tomorrow we could get news that key members of Congress have pledge to resist the new legislation and we will see a bull market making volatility the only constant in the market.

From the CNBC article:

“It’s politically expedient to vilify these institutions, but that doesn’t mean it’s the right thing to do,” said Walter Todd, portfolio manager at Greenwood Capital Associates in South Carolina.”They’re trying to win back political points after losing the Massachusetts election. Obama comes out with something different every day for financial reform. It creates a very uncertain environment for these companies,” he said.

Think about it, what if your job paid you a different salary every week without notice? What if the tax law regarding your salary was adjusted every month — sometimes your employer paid his half of social security, sometimes you pay it all. What if self-employed contractors had no idea what their tax rate would be in any given year? How do they decide what to pay employees or how many to hire?

Uncertainty was a major problem for investors and entrepreneurs during the Great Depression. Our government was constantly tinkering and moving the goal line, but investing, wealth building and planning for the future is based on assumptions about where that goal line is placed. When the benchmarks are certain and constant, there is no guarantee of a return. Your assumptions can turn out to be right, sometimes they turn out to be wrong. Everyone understands there is risk in a stable market.

However, when our government is constantly changing the variables, there is no way to even construct assumptions. You might as well place a list of stocks on the wall and throw darts at them. You will have a better chance at profitability that way — or you can throw all your money toward political lobbyists . . . yikes!

When the government changes regulations on various industries and companies on a regular basis, they are creating uncertainty that does not benefit investors. If Washington D.C. is picking winners and losers, there is no way that the rest of us can be expected to do it.

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Joshua Caucutt, a blogger since 2006, writes for several personal finance blogs. Regular topics include saving money, avoiding debt and family finance. Most notably he posts about government fiscal policy at Rocket Finance.

All posts by Joshua Caucutt (Staff Writer)

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