Pick a villain — you won’t be far wrong
THINGS looked awkward enough when David Cameron moved into No 10. But the sad fact is that in the space of one short month, the international outlook has got significantly worse, hence his particularly gloomy speech on Monday, warning of austerity to come.
Doubts about Greece multiply. The Spanish Parliament could muster only a majority of one to pass the government’s rescue package — al most certainly inadequate anyway. Doubts hover over the debts of Italy and Portugal. Banks everywhere who hold these countries’ government bonds wish they didn’t.
The accompanying feeling that the euro is doomed has been rising, almost by the day. The currency system is like a line of 16 swimmers linked together by two, possibly four, yet to master the breaststroke and in danger of dragging down the rest.
We may not be in the euro, but we should have no doubts that growing signs of instability in that system have an effect on us.
Sovereign debt may once have been the refuge of investors looking for safety. Now, large chunks of it, especially in Europe, look more like a gamble on the racecourse.
The possibility, perhaps probability, that the world faces a doubledip depression has been on the rise. The need for Britain to resume its traditional role as a safe haven is paramount.
And, of course, the blame game goes on. Everyone has their own favourite villain in the drama of the past two years. In our own case, we have the last Labour Government, whose spending plans are being unearthed in time-honoured fashion.
To be entirely fair, the debts are in no small measure due to the cost of rescuing t he banks. Gordon Brown’s special responsbility lies in his weird belief that these costs need have no impact on his own spending plans.
APERNICIOUS myth, which has spread outside the Left-to-centreground politicians and commentators, is that the depression is down to a rash reliance upon what is called ‘ the free market’ or ‘market forces’ to provide economic stability and also to contain irresponsible banks.
It is certainly true that stock markets swing from boom to bust (and back again). That is normal. And, again normally, this creates problems which can cause difficulties but which are nevertheless containable.
What has turned a problem into a disaster has been the involvement of the banks in a crisis of survival. There is a great irony in this.
We can trace the origins of the banking crisis — which spread from the U.S. across the world — to the desire of American politicians to regulate lending, mortgages in particular, and for political motives.
It started during the dim and distant days of President Carter, back in the Seventies, but was backed by successive administrations of both parties, with President Clinton proving the biggest disaster of all.
Two U.S. government agencies, known colloquially as Freddie Mac and Fannie Mae, used spectacular sums of public money to keep the mortgage market pumped up and to encourage ordinary banks to lend to home buyers.
The old practice of bankers ‘redlining’ certain areas as dangerous territory for home loans or other credit was virtually forbidden. So those with poor credit ratings — or none — got their loans.
The banks saw an implicit guarantee in the operations of the official agencies which bundled up banks’ mortgages and sold them on. And Wall Street dealers started huge, worldwide markets, based on buying and selling packages of these mortgages as investments.
WHEN the housing bubble burst in the U.S. and mortgage holders defaulted in their thousands, the damage rippled through the world, unleashing a veritable tsunami of toxic debts. Derivatives dreamed up on Wall Street became valueless. Banks stopped lending to each other for fear they would not get their money back.
You may call this what you like — and I have plenty of harsh things to say about banks and bankers — but it was not the consequnces of free markets. If banks had been left to their orginal lending strategies, what Washington dismissed as their ethnic and sexually discriminatory prejudices, the problem would not have arisen.
So now, here’s a thing! We look to politicians who caused the problem in the first place, to come up with regulations to safeguard the system. It does not make you too confident, does it ?
As ever, politicians also blame speculators. The Germans have banned a form of ‘short selling’ of government bonds — a way to insure against markets slumping — under the delusion that it will make investors happier to keep lending.
If this is the best that a normally sensible government can come up with, just think of what less responsible political leaders might yet devise.
Finance ministers, including our own, believe banks should pay some special tax or find more capital before lending. As a punishment, this is fine. However, it hardly sounds like the way to help banks l end more to their traditional customers, which everyone agrees is now urgent.
Let us pray that the next month does not come up with more bad news. But don’t bet on it.