TheGRCBlueBook Editor’s Letter – September, 2013

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TheGRCBlueBook Editor’s Letter – September, 2013

free_249263  Autumn waterfall

September represents change in New England.  October is the peak of fall foliage season with its brilliant colors, crisp air, fresh apple orchards and the transition from fall to the last remnants of summer fade in distant memory.   Markets also appear to be experiencing a great deal of change as well.  Historically, fall has ushered in volatility in the markets and this year appears to be no different!

 Chairman Ben Bernanke and the Federal Reserve Bank Governors surprised the markets and did not begin to taper the so called “Quantitative Easing” or purchases of mortgage backed and treasury bonds.  Unfortunately, the “Taper” Caper signals that the economy is not improving as much as expected even though we are now half way through the second half of the year. 

 Most analysts concluded that the Fed would begin to taper its purchases and many had predicted a reduction in the range of $10 – $20 billion.   The assumption was that the economy was improving enough to begin to taper but was not strong enough to pull back too quickly. 

 To Taper or Not to Taper!  The process of making decisions is complex and includes many variables.  Ben Bernanke has been consistent in his speeches that the decision to taper will be based on the “data”.   It appears that the markets misread which metrics would be most influential in the decision making process to taper.

 What lessons can be learned from Ben Bernanke about risk management and dealing with uncertainty?  First, let’s look at decision-making under uncertain conditions.  The Federal Reserve has a range of data points at its disposal which inform its decision making process.   Chairman Bernanke does not make decisions in a vacuum as he chairs and guides the Board of Governors.  Building consensus on key risk decisions is critical to the operation of the Federal Open Market Committee in directing monetary policy. 

Consensus building does not mean that everyone on the committee agrees.  Reasonable people disagree that data considered from their perspective may point out risks containing multiple variables that play into how outcomes unfold or materialize.  The uncertainty of outcomes leaves room for disagreement.  In fact, the discipline of the process may be more important than the actual decision itself.

 What are the important strategic lessons learned from the decision by Ben Bernanke to continue quantitative easing?

 First, the process is time-constrained.  The FOMC meets 8 times per year and must make a decision each meeting.  Markets wait for the Fed decision on monetary policy and reacts accordingly.   People need the certainty of a decision, good or bad, to guide their actions.

 Secondly, data is used as a guide to inform decision making yet the interpretation of the analysis and final conclusions are based on objective and subjective analysis of  perceived outcomes.   Data facilitates but does not govern decision making.

 Third, the markets and members of the FOMC monitor their decisions in real-time and make adjustments along the way as circumstances change.   Build in and anticipate corrective action steps as conditions dictate.

 The final lesson may be that risk management is a process that is responsive to change.  The processes used by Ben Bernanke and the Board of Governors are the result of lessons learned over many years through various market and business cycles.   

Not everyone agrees with Bernanke’s candid disclosures of Fed policy or the decisions made by the FOMC but the process has worked arguably well through the financial crisis.  The FOMC is one example of a live demonstration of effective risk management replete with its successes and failures. 

 Going forward TheGRCBlueBook will highlight additional examples of the art and science of decision-making under uncertain conditions.  I hope that you find the articles informative.

Executive Director, TheGRCBlueBook

TheGRCBlueBook mission is to become a global risk and compliance community site and resource portal for sharing best practice across all highly regulated industries.  A one stop source for all things risk and compliance related.

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