Friday, January 09, 2009

Beware the U.S. Congress

There are plenty of conflicts and problems going on around the world, each vying for the attention of global investors. The war between Israel and the Palestinians is currently on the front burner. It's a conflict that threatens to pull in Iran, which continues in its race toward a nuclear weapon. The wars in Iraq and Afghanistan are still going on. Terror attacks in Mumbai threaten to break the shaky peace between Pakistan and India. And Russia is flexing its muscles by threatening former Soviet republics and restricting the flow of natural gas to Ukraine and Western Europe.

Given all these seemingly intractable problems, which poses the biggest risk for investors? According to Ian Bremmer of the Eurasia Group, the top risk of 2009 is financial regulation in the United States and the rising power of Congress.

Bremmer reminds us that following our last financial crisis, Congress gave us the Sarbanes-Oxley act. We are likely to get something much more onerous this time. The bottom line is that there will be considerably more regulation. Congress will try to regulate everything from the rating agencies to complex financial securities. It will also reform the regulatory agencies. The risk is that Congress may make things worse by delivering bad regulation or simply going overboard in a manner that prevents innovation.

Bremmer also worries that government is getting involved in the actual management of private enterprises. It already holds large stakes in publicly-traded companies, and there is talk of a car czar to oversee the automobile industry.

Finally, Bremmer is concerned that fiscal policies meant to spur the economy may fail. Infrastructure spending, for example, may end up doling dollars to favored pork barrel projects instead of targeting the most worthy programs.

The Eurasia Group is perhaps the best political risk consultancy in the world. It certainly is an ominous sign that this highly-respected firm thinks the U.S. Congress poses the greatest risk to investors in 2009.