The world can’t af­ford an­other fi­nan­cial crash

The Pak Banker - - OPINION - Al­lis­ter Heath

THEY bounce back af­ter ter­ror­ist at­tacks, pick them­selves up af­ter earth­quakes and cope with pan­demics such as Zika. They can even han­dle years of eco­nomic un­cer­tainty, stag­nant wages and sky-high un­em­ploy­ment. But no de­vel­oped na­tion to­day could pos­si­bly tol­er­ate an­other whole­sale bank­ing cri­sis and proper, blood and guts re­ces­sion.

We are too frag­ile, fis­cally as well as psy­cho­log­i­cally. Our economies, cul­tures and poli­ties are still pay­ing a heavy price for the Great Re­ces­sion; an­other col­lapse, es­pe­cially were it to be ac­com­pa­nied by a fresh bank­ing bailout by the tax­payer, would trig­ger a cat­a­clysmic, un­con­trol­lable back­lash.

The pub­lic, whose faith in elites and the pri­vate sec­tor was rat­tled af­ter 2007-09, would sim­ply not wear it. Its anger would be so ex­plo­sive, so-all en­com­pass­ing that it would threaten the very sur­vival of free trade, of glob­al­i­sa­tion and of the mar­ket-based econ­omy. There would be calls for wage and price con­trols, puni­tive, ul­tra-pro­gres­sive taxes, a war on the City and ar­bi­trary jail sen­tences.

For fear of al­low­ing ex­trem­ist or pop­ulist par­ties through the door,main­stream politi­cians would end up adopt­ing much of this agenda, with dev­as­tat­ing im­pli­ca­tions for our long-term pros­per­ity. Cen­tral banks, in des­per­a­tion, would em­brace the purest form of money-print­ing: they would start giv­ing con­sumers ac­tual cash to spend, tem­po­rar­ily turbo-charg­ing de­mand while de­stroy­ing any re­main­ing re­spect for the idea that money needs to be earned.

His­tory never re­peats it­self ex­actly, but the last time a re­ces­sion was met by pure, unadul­ter­ated pop­ulism was in the Thir­ties, when the Amer­i­cans turned a stock mar­ket crash and a se­ries of mon­e­tary pol­icy blun­ders into a de­pres­sion. Pres­i­dent Her­bert Hoover signed into law the Smoot-Haw­ley Tar­iff Act, dreamt up by two eco­nom­i­cally il­lit­er­ate Repub­li­can sen­a­tors, slap­ping mas­sive taxes on the im­ports of 20,000 goods and trig­ger­ing a global trade war. It was per­haps the most eco­nom­i­cally de­struc­tive piece of leg­is­la­tion ever de­vised, and it took un­til the Nineties be­fore the dam­age was fi­nally erased. That is why we must all hope that the tur­moil of re­cent days in the fi­nan­cial mar­kets, and the in­creas­ingly wor­ry­ing eco­nomic news, will turn out to be a false alarm. It would cer­tainly be ridicu­lously pre­ma­ture, at this stage, to call a re­ces­sion, let alone a fi­nan­cial cri­sis. But at the very least we are see­ing a ma­jor dose of the "dan­ger­ous cock­tail of new threats"rightly iden­ti­fied at the turn of the year by Ge­orge Os­borne, a de­vel­op­ment which will have political reper­cus­sions even if the econ­omy even­tu­ally mud­dles through.

In­vestors in eq­ui­ties, in­clud­ing mil­lions of peo­ple with pri­vate pen­sions and Isas, have al­ready lost a for­tune; they won't be too happy when they be­gin to re­alise the ex­tent of the dam­age. Growth is slow­ing ev­ery­where, and the mon­e­tary pump-prim­ing of the past few years is look­ing in­creas­ingly in­ef­fec­tive. Traders be­lieve that in­ter­est rates won't go up in Bri­tain un­til 2019, and there is in­creas­ing talk that neg­a­tive in­ter­est rates could be­come nec­es­sary across the de­vel­oped world, fur­ther crip­pling savers.

No pos­i­tive spin can be put on any of the lat­est de­vel­op­ments. Bank­ing shares have taken a beat­ing; China's slow­down con­tin­ues; Maersk, the ship­ping gi­ant, be­lieves that con­di­tions for world trade are worse than in 200809; in­dus­trial pro­duc­tion slumped in De­cem­ber, not just in Bri­tain but more so in France and Ger­many; en­ergy prices are dev­as­tat­ing Middle East­ern and Rus­sian economies; and ster­ling has tum­bled.

It is al­ways a sure sign that panic has bro­ken out when fi­nan­cial mar­kets re­spond badly to all pos­si­ble sce­nar­ios. The prospect of higher in­ter­est rates? Sell, sell, sell. A chance of lower rates? Sell, sell and sell again. A rise in the price of oil is met with as much angst as a de­cline. The fi­nan­cial mar­kets re­main ad­dicted to help from cen­tral banks: they are des­per­ate for yet more in­ter­ven­tions, re­gard­less of the con­se­quences on the pric­ing of risk, the al­lo­ca­tion of re­sources or the cre­ation of un­sus­tain­able bub­bles that only en­rich the own­ers of as­sets.

This is ex­actly the tonic that the pop­ulists have been wait­ing for. De­spite their dra­matic emer­gence, they have so far failed to make a real break­through. The SNP was un­able to win the Scot­tish ref­er­en­dum and the Na­tional Front didn't gain a sin­gle re­gion in France. Mar­i­ano Ra­joy re­mains Spain's prime min­is­ter, and anti-es­tab­lish­ment par­ties have been thwarted in Ger­many. Even lighter forms of pop­ulism, such as Ed Miliband's, were re­jected. Syriza's vic­tory in Greece was one of the few gen­uine pop­ulist tri­umphs; but it was soon crushed by the com­bined might of Brus­sels and Frank­furt. This could be about to change. The fact that Don­ald Trump and Bernie San­ders both won their re­spec­tive New Hamp­shire pri­maries is cer­tainly one re­mark­able in­di­ca­tion of the state of mind of many US political ac­tivists.

Newspapers in English

Newspapers from Pakistan

© PressReader. All rights reserved.