Any other business

If there’s a crash now, the markets will have done it to themselves

20 February 2016

9:00 AM

20 February 2016

9:00 AM

All this talk of a new financial apocalypse, so soon after the last one, is starting to annoy me. Partly because investors as a crowd are so irrational; -partly because so much that governments and central banks have done to contribute to the current market mayhem seems to work against the sensible efforts of ordinary folk to build a bottom-up recovery.

Markets first. We’ve had hissy fits about China, even though connections between the Chinese and UK economies are so marginal. We’ve had near-hysteria about the prospect of (and in the US, the start of) rising interest rates. Now there’s a panic about European banks, because Deutsche Bank, midway through restructuring, looks weaker than it should; within days, traders are reassured about Deutsche but down on Credit Suisse. By the time you read this, they will have spotted another weakling — and short-sellers will make another killing out of it.

So it goes: markets are not just unreliable indicators, they are also populated by chancers and fools, and that makes them dangerous as mood-makers. If shares go on sinking, accompanied by swirling rumours about banks, then whatever the underlying truth, consumers will feel less confident and businesses will postpone investments and hirings. And we’ll talk a just-perceptible slowdown of a relatively healthy real economy straight back to recession.

But what is ‘the underlying truth’? And what have our leaders done to correct it? The ultra-low interest rates thought vital to stave off depression seven years ago are now a huge problem. Raising them could turn a ‘looming debt crisis’ into a real one, as well as provoking a bond-market crash; keeping them this low until the end of the decade, as now looks possible, would encourage the wrong borrowers to pile on more debt; turning them negative, as is happening in Japan, Sweden and Switzerland, looks like sheer desperation.


As for pumping liquidity into stalling economies through quantitative easing — for more of which the eurozone is anxiously hoping — we can see that it has diminishing returns, and adverse after-effects in the form of artificially boosted asset prices that are waiting to fall. It was the Monetary Policy Committee free-thinker Adam Posen who likened QE to a defibrillator: a one-off shock to keep the patient alive, not a thrice-daily treatment. Again, the more we see of it, the more we sense the authorities have no idea what else to do. And the sooner the doom will become self-fulfilling.

As for politics, could there be a worse moment to launch the Brexit debate, with all the uncertainty it brings? After every economic upheaval we ask who caused it: us, them, or all of us? This time it’s definitely them: the footloose investors, the grandstanding politicians and the monetary boffins who are still trying to solve the crisis before this one.

Who stands tallest?

Speaking of monetary boffins, I’m grateful to former Bank of England governor Mervyn King for the observation that ‘central bank governors have become shorter and shorter’. Tiny Dr Janet Yellen of the US Federal Reserve stands well below the shoulder of her 6ft 7in predecessor Paul Volcker, whose tight-money policies saved America from inflation in the early 1980s. In terms of presence, she also measures well below Alan Greenspan (during his tenure, that is, when markets credited him with supernatural powers, rather than the diminished hindsight view of him) and Ben Bernanke, whose quiet authority was based in deep study of financial history.

At the European Central Bank, Mario Draghi is almost a six-footer, and for a while — after he spoke of doing ‘whatever it takes to preserve the euro’ — he looked like the tallest leader in Europe. But right now they all look small, and Draghi is hunched against pressure from politicians to deploy monetary tools, whatever their consequences, in place of the structural reforms they themselves lack the will to deliver. Not one of them have the stature of Karl Otto Pöhl or Helmut Schlesinger, presidents of the pre-euro German Bundesbank.

As for our own governors, none in recent memory have had to stoop to pass through the Bank’s doors or stand on a box to make speeches, though it was said of Gordon Richardson by one observer in the 1970s, ‘His personality was such that he seemed to be tall — but he wasn’t.’

After Richardson, Robin Leigh–Pemberton likewise had a touch of grandeur, Eddie George had command of markets, and Mervyn King was a world-class economist. So what can we say about the incumbent Mark Carney, who George Osborne announced as ‘the outstanding central banker of his generation’ but who has turned out to be no more than a smooth technocrat, a dull public speaker and an uncertain forecaster? He’s probably the least -charismatic governor since Leslie O’Brien, before Richardson; history, I fear, will judge him no more than medium height.

Staying on

I’m guessing this column is well read in the boardroom of EDF. After I raised the alarm about the UK electricity gap two weeks ago, the French energy giant that largely controls our nuclear power sector decided to postpone decommissioning four existing reactors — one each at Hartlepool and Torness in Scotland, and two at Heysham in Lancashire — for up to seven years, to between 2024 and 2030.

I predicted long ago that this might have to happen. The postponement should cover the shortfall from delayed completion of the new Hinkley Point plant, assuming it ever happens: EDF still hasn’t made a final commitment. And it raises again my wider question for power bosses and civil servants. How can you go on closing capacity of all kinds — currently including coal-fired stations at Rugeley in Staffordshire and Fiddler’s Ferry in Cheshire — when you still haven’t got a comprehensive plan to replace it?

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  • e2toe4

    Consistently excellent analysis–this weeks is just another in a succession of similar pieces..

    The last seven years have seemed like an ever extended pause before the *second shoe* falls in the credit crunch which probably has to involve finding the correct price for money.

    The politicians have been afraid to trust people with enough sense to realise the system needs to reset and that will mean the sort of economic pain that will make the so-called recession after the credit crunch look mild.

    To say this is not to wish it to be so–but the longer it is postponed the worse it will be.

    Various current political stories..The rise of Trump and Cruz, the general rise of insurgent parties like the SNP or Syriza, or insurgencies within existing parties such as the Corbynist movement within Labour and people can all (in some degree) be understood as expressions of that general feeling that *They* aren’t telling *us* everything, and they aren’t prepared to trust us.

    Given that the ballast in most societies comes in a significant part from *savers* the continuing failure to correctly re-set the price of money is slowly but surely eroding this source of stability and converting savers into spenders. That this creation of social instability is the underlying aim of all Western Liberal Government’s economic policy right now only helps confirm that *they* are indeed desperate.

    • mikewaller

      I am lost as to how you can think that the very important points you make are a natural follow on from MVW’s piece. He is in full 1929 “the fundamentals are sound” mode to steady the markets. You are making clear that they are not.

  • Todd Unctious

    At least in the next collapse they will bite the bullet, take over RBS and break it up.
    Osborne has allowed Britain to bleed out. Increasing National debt by nearly £800 billion in 6 years of supposed austerity rather than face up to his rich paymasters in the CoLC. How demeaning for the Eton toffs having to set their stall out to entice and retain the oligarchs and mafias of Russia and the Middle East simply to give the illusion of wealth.

  • mikewaller

    “Markets first. We’ve had hissy fits about China, even though connections between the Chinese and UK economies are so marginal”

    The above puts me in mind of a pal of mine who is justifiably proud of running a wonderful firm producing an iconic British product, the components of which he sources entirely from within the UK. The only question is, as I unkindly pointed out to him, where does the money come from that constitutes his sales? In many instances, I would guess, from people who have made fortunes importing all sorts of everything from all sorts overseas places. Similarly, whilst it is true that we have made shamefully small inroads into the Chinese market, some of those to whom we sell a lot, particularly Germany, have been much more successful. And when they catch a serious cold, we will get pneumonia. Sadly, anybody who has had the good sense to view Robert Peston’s valedictory piece for BBC2 (“The Great Chinese Crash?” – still available on the BBC iplayer), the future with regard to China does not look particularly sanguine.

  • jim

    I still don’t understand how we can pretend eurobanks are safe when we all know they’re not going to get their money back.Even the compliant Irish will welsh on their debt to Germany eventually..no one really expects them or anyone else to write off the entire 21st century to baling out German banks ….even without the bad faith of the ECB.

  • Tickertapeguy

    There is a big difference between the 1929 stock market crash and the following economic nightmare in the 1930’s to 2016.

    Now we do not have the safety nets of any kind. Unlike the 1930s’ which the US government set up the “New Deal” to help out, today all methods to avoid a crash are gone. Also gone are the “stimulus packages” that bailed the US during the 2008 crash. Gone are the “Quantitative Easing” (where newly printed money is used by banks to buy bonds)

    European banks admitted to 1 trillion dollars in bad loans (loans that will never be paid). One reason why two of Germany’s major banks are in a crisis. They lost 14 billion Euro.

    China’s stock markets crashed partly due to her new system of “circuit breakers” that kicked in when selling reached a certain level. Instead of calming the stock holders it only increased panic. China hastily removed them but the damage inflicted on her stocks to her banks may end up costing China 5 trillion dollars. China has pumped in over 600 billion dollars from her reserves and still money is flowing out of Chinese banks.

    China’s exports are hammered due to the inability of consuming markets to absorb her exports and China cannot sell her products to her own consumers. China is not at the stage where she is a “consumer based” economy. Neither is India.

    Saudi Arabia entered into a crude oil “war” against the US shale industry by refusing to lower her production. Now crude is at an all time low and Iran is just about to increase production when all sanctions are removed, adding another 1 million barrels of oil on a world market that is shrinking. Brazil shrank by 4% and will shrink another 4% in 2016. Venezuela to Japan’s economies are shrinking.

    The world has less chance to bounce back in 2016 than ever before.

  • Jonathan Tedd

    What we are witnessing now is the unravelling of a global economic system that has been turned into a giant Ponzi scheme. Collapse is the only way in which such schemes can ever end.
    Current turmoil in the financial markets might presage this event. To be sure, more time might yet be bought, albeit at huge and futile expense. This, however, is simply a matter of when. The if of collapse is not in doubt. Technically, this is a financial system disaster rather than an economic one, though this distinction will do nothing to shield the real economy from the consequences.

    Tim Morgan – Surplus Energy Economics (The Ponzi Economy pt 4)

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