Drifting to the next crash

SHORTLY after the great financial crash I asked Sir Paul Tucker, then the deputy governor of the Bank of England, what reasons he would give his grandchildren for the causes of the carnage.

Tucker paused, took a deep breath, looked me straight in the eye, and said: ‘drift. Everybody drifted. The central bankers, the bankers and the politicians. We took our eye off the ball.’

It was a simple yet brutally frank answer, one devoid of the jargon about boom and bust or other blame-game excuses one usually hears from central bankers.

yet it was also the most damning of all explanations because Tucker’s answer implied responsibility on the part of the political elite for not seeing what was under their noses.

So it was interesting that Christine lagarde chose the title ‘Steer, don’t drift’ for her big ‘lay of the land’ IMF speech in Washington yesterday ahead of next week’s annual meetings in Bali.

Quoting the US poet, oliver Wendell Holmes Sr, the IMF boss said: ‘To reach a port, we must sail sometimes with the wind and sometimes against it – but we must sail, and not drift, nor lie at anchor.’ or in shipping terms, ‘we need to steer the boat, not drift’. Tucker would approve.

lagarde went further in her speech, asking whether ten years after the global financial crisis, are we any safer? She said: ‘My answer is: “yes, but not safe enough.” ’

The reason why she says this is easy to spot: the financial system is still extremely fragile because debt levels have soared around the world – from the advanced countries to the low-income ones.

Global debt – both public and private – is now at an all-time high of $182 trillion, almost 60pc higher than it was in 2007.

Quite rightly lagarde warns this build-up of debt has left governments and companies more vulnerable than ever to a tightening of financial conditions.

The impact of rising interest rates in the advanced economies is already hurting emerging and developing economies. This process could become more challenging if it were to accelerate suddenly, she says, leading to market corrections, sharp exchange rate movements, and further weakening of capital flows.

What’s more, the IMF estimates that emerging economies – excluding China – could face debt portfolio outflows of up to $100bn: about the same level of outflows during the financial crisis.

does this suggest that we are drifting into the next crisis?

Not yet, says lagarde. But it is a wake-up call for the inevitable downturn ahead.

Not to rock the boat, she has a long wish list. Financial reforms must be stepped up, the multilateral trade system opened up, risks more closely managed and corporations must pay their taxes.

Emerging countries must be encouraged to reduce risks from high corporate debt. Public assets need to be used better.

Western nations need to reduce their deficits while maintaining investment in a fair and friendly way.

That’s a tall order. If there is another crash, we can’t say that we drifted into the rocks without knowing the risks.

No-brainer after Brexit

THE good news is that figures for the UK’s manufacturing sector in September show that output is up. Again. The September’s rise to 53.8 for the IHS Markit/CIPS Purchasing Managers Index is the 26th consecutive monthly rise.

Instead of dissing the numbers, as many have, we should be over the moon that companies are enjoying a four-month high in new orders from domestic and export markets. Exports were up on August’s numbers with more demand from the US, Russia, the Nordic countries, Canada and yes, despite Brexit, from Europe.

Backlogs of orders are down to a ninemonth low and small to medium manufacturers are hiring more staff.

Business is getting on with its job despite the uncertainties.

Now we need the politicians to do their bit by getting a deal that ensures supply chains do not break down after Brexit.

Staying in the EEA and joining Efta is the no-brainer.

Electric Elon

THANK goodness the SEC saw sense by allowing Elon Musk to stay on as Tesla’s chief executive after his tweeting disaster.

Corporate life would be dull without geniuses like Musk.

Investors were delighted too, and the shares have roared back.

later this week we will see if Musk can get enough of his Model 3 cars on the road too.