The Rude Awakening

Since November 2009, Hong Kong equities fell 10% and it underscores the increasing threat to valuations as China curbs growth and the US proposes limits on the banking industry. The heyday of the Bush-Obama bailout frenzy is coming to an end. Its chief architects – Treasury Secretary Geithner and Fed Chairman Bernanke – are politically dead or dying, its loyal opposition – Obama adviser Paul Volcker and FDIC Chairman Bair – is gaining rapidly in influence.

We all know along that TARP was a classic financial blunder and ultimate moral hazard. It rewarded guilty bankers while shafting innocent taxpayers now stuck with the bill. The Fed’s zero interest rate policy is a ticking time bomb. It subsidizes and stimulates high stakes gambling on Wall Street while it robs prudent savers of nearly every penny they hoped to earn in interest.

Public opinion regarding the president’s handling of the federal deficit has nosedived. Back in March, 52% of voters approved and 47% disapproved. Now, the numbers have reversed dramatically to the opposite side – only 36% in favour and 62% against.

Paul Volcker who previously shunned and ignored by most of the Obama team has re-emerged from the shadows and regained the limelight. He is looking over the president’s shoulders. He is pressing the administration to get tough with Wall Street. And ultimately, he could push Obama to change course on key aspects of the bailouts.

Whether he will retain that standing – in the heat of battle or in the wake of a renewed banking crisis – remains to be seen. But for now, his reappearance on the front lines is a metaphor for the sweeping mood change among voters and a possible policy shift at the White House.