The sub-prime crisis kicked off concerns of financial troubles in the USA in September. Banks were aware that the other banks they are lending to might not be as creditworthy as they thought. Money tightens. In the UK, the government fails to react. They then block the proposed takeover of the Norther Rock Building Society by Lloyds TSB, and paralysed like rabbits caught in headlights, they witness a thing that has not been seen for over 150 years – a run on a bank.
Then like in a movie, where calm is tipped into terror but only in little steps, the good guys arrive and guarantee that all will be fine. The UK government which could have solved the NR problem before it even happened, goes public with a guarantee that no deposit-holder will be allowed to suffer. All savings will be safe. Things get back to normal, and the horror of the storyline recedes once more. The bad things will not be allowed to happen, whatever the cost.
But the movie’s not over yet.
Companies that insure bonds in the USA were last week becoming unable to pay the claims they were receiving. Another government, this time the US runs around frantically trying to find out what can be done to save the insurers. A $30 billion package is cobbled together by banks, and again the horror recedes. Don’t worry. Bond-holders will not be allowed to lose their money either – for now or at least, and as long as the claims don’t exceed $30 billion.
The week before, signs of stress had also been visible in major US banks. They quickly sold assets to sovereign investment funds from the Middle east and China, which eagerly scooped up what was on offer. Then the banks gave out reports saying that the sum total of their sub-prime losses had been capped, and absorbed. Let’s hope they are right.
The US government then announces a drop in interest rates, and a recession-busting tax cut. The measures were meant to reassure tumbling share markets, but somehow the urgency with which they were taken, sent a different message. It was just a touch panicky.
Then the world’s leaders all meet in Davos, and starting making reassuring noises, poo-pooing George Soros’ prediction that the financial situation is about to trigger major panic. Talking from the comfort of five star hotels in Alpine paradise, the softly spoken reassurances of the world’s leaders placed a blanket of comfort over all media networks. The orderliness of the world will be preserved, they opined, just like the snow, that paints the Christmas card scenery that greets them every year in Davos, all expenses paid.
But even as they spoke, a French rogue trader loses four Nick Leesons in Paris in a day, and another avalanche of worry ripples down the snowy financial peaks. At the weekend, the clouds lift a little, and some rays of sun promising a new spring not many months away light up the scene, but then the movie set world of Davos, where political actors charm their audiences, is over.
On Monday morning, another group of less powerful but more real players takes over the lead role in the story, as the politicians fly home. Traders located across the globe, who live with the unmentioned linch-pins of this brave new financial world, fear and greed, start to speak, and their language is the opposite to that heard on the Davos movie set. The reports coming out from those who use their guts to feel their way each day, could not be more different. Their language is unmistakeably now one of fear. See this from the Wall Street Journal –
Investors around the world have been jittery for weeks about a U.S. slump, which would likely weaken demand for exports and drag on global growth. There is also concern about a worldwide credit crunch triggered by rising defaults in risky U.S. mortgages, which has led to mountains of bad assets at major American and European banks.
“There’s a lot of uncertainty out there: uncertainty over the U.S. economy, uncertainty over China’s economy,” said Rob Hart, an analyst with Morgan Stanley in Hong Kong.
“People are also worried about contagion in Europe. If the U.S slows down, will it trigger a slowdown in Europe?” he said.
These phrases are spoken straight from the gut. ‘Jittery, slump, mountains of bad assets, uncertainty over the US economy, uncertainty over China’s economy, contagion in Europe’.
You have not heard anything like that in my adult lifetime (aged 53). In the UK in 1974, a bad collapse of confidence happened, and the economy struggled to find its feet. It didn’t do so until Thatcher brought in what economists call micro-economic supply-side reforms, or what you and I call, common sense. She has been demonised ever since, but if she hadn’t done what she did, Britain would have been finished.
The world is now faced with the same situation. No one has been taking responsibility. All the controls of yesteryear, the necessity for which was learned through hard experience, have been taken away. People have been making stupid decisions in nearly all markets. Politicians too have been wasting money on an industrial scale. People trying to do the right thing have been driven to the sidelines while the fools have been allowed to make billions by assuming crazy risks, or building political position by wasting everyone else’s money.
Once the situation hits home, it will be goodbye to the Clintons, the Bushes and all. And it will be Hello Obama. In the UK, goodbye New Labour, Blair and Brown, and Hello David Cameron. While the fools are removed from the stage, everyone else needs to get their tin hat on for the coming storm which their irresponsibility caused.
But once the storm has blown through, we can look forward to a healthier political landscape . It will clear the air, and remove much of the pollution that has built up in the atmosphere.
As for China, it’s in a mighty boom that must eventually bust. But the country’s been around for 4000 years. Things will change there too but it isn’t going to disintegrate. It will no doubt be all the healthier for a growth pause too.
As for the EU, no one would be surprised if cracks appear in the eurozone. This storm might for me and my ilk, turn out to be the most beautiful one ever known if it started to crack open the corruption and stupidity of the Brussels bureaucracy. Britain might get her freedom back and experience a second common sense revolution, if the wind blows hard enough.
The movie of financial terror might yet have a happy ending.
It’s an ill wind……