Type your text, and hit enter to search:
Faith + Politics
Faith + Politics
> Turbulent Times
Markets and politics
Winston Churchill wrote that in 1929 under his New York bedroom, where he was staying on a speaking tour, “a gentleman cast himself down fifteen storeys and was dashed to pieces, causing a wild commotion and the arrival of the fire brigade.” The cause was attributed to events of the previous day, Tuesday 29th October, when shares on the Wall Street stock market fell sharply for the second day in a row. Churchill himself lost over £10,000 in 1920s prices. That evening he was guest of honour at a dinner with many business guests – in a burst of dark humour a guest proposed a toast to “friends and former millionaires”. On the Wednesday Churchill visited the dealing floor of the New York Stock Exchange. He found the scene surprisingly calm but the dealers were “like a slow motion picture of a disturbed ant heap, offering to each other enormous blocks of securities at a third of their old prices…”
Almost eighty years later, the recent falls in stock markets across the world provided occasion for us to dust off such stories of crashes and financial disasters, though we are some way from a 1929 repeat. It is unlikely any of our political leaders today will be having such a direct experience of stock market panic. Thoughts turn more to 1998, when the hedge fund Long Term Capital Management (LTCM) became a financial black hole when Russia defaulted on its debt. The US Federal Reserve had to organise a bail out and cut interest rates. “Is history repeating or is it different this time?” is the question asked across dealing floors in the City and abroad.
Markets have been reacting to problems in the US sub-prime (higher risk) mortgage market. Some institutions were too eager to lend and many loans had high interest clauses in the small print so that borrowers have been defaulting on their mortgages. President Bush’s belated expression of empathy for those who have lost homes is unlikely to have endeared him much to victims who have lost almost everything.
The mortgages had been repackaged into bonds and sold to financial institutions. On top of these, many derivatives have been created, magnifying the impact of the underlying securities.
As confidence in the sub prime sector dropped, hedge funds and others found they had difficulty pricing the securities in their portfolios. On 9th August, the French bank BNP Paribas announced it had suspended three of its funds as a result. This sense that market prices could be some way below last published prices acted as an injection of fear, which has spread to markets around the world. Banks became cautions about lending to each other, prompting central banks to supply cheaper finance to money markets.
On one day the FTSE 100 fell over 3.7% as markets sought to adjust to new realities. This completed a fall of over 10% from a high. The private equity funds questioned by the Treasury Select Committee a few weeks ago had helped buoy shares because of speculation about new bids for companies. Now it is harder for them to borrow cheaply, making some bids less likely.
The global economy however remains healthy, according to the IMF. In the UK, the latest Bank of England Inflation Report indicated that interest rates would probably have to rise to 6% to reduce inflation to the target level over two years, but the outlook for inflation (down) and growth (strong) in the next few months was positive.
At times like these, there is little government can do immediately. Stock markets will always gyrate as prices factor in the latest information, as well as fear and greed at times. Barring a financial crisis, central banks are unlikely to cut rates unless they can see a direct economic impact. Government policy has to continue to focus on economic stability and an investment orientated environment for the long term.
This article previously appeared in
Stephen Beer, Friday 13 August 2007
Tribune 13 August 2007, 13/08/2007
Inflation and interest rates: can we curb the cost of living without a recession?
Not an easy task given uncertainties, especially if energy and commodity prices do fall later in the year. Ultimately, radical economic reform required.
The shock of war: inflation and central banks
Central banks are struggling to head off general inflation while dealing with price shocks that will be negative for growth. They waited too long, which has made their tasks more difficult.
Has the Bank of England done too little too late?
The Bank of England has raised interest rates, but that does not mean it has been most effectively managing inflation risks.
What should the Bank of England do about inflation?
The Bank should signal it will act if higher prices look likely to translate to higher inflation rate.
Covid has hit the poor hardest. Is the IMF right to call for a Jubilee?
The IMF's Fiscal Monitor is actually quite radical.
A fiscal No Man's Land: Modern Monetary Theory and the Budget
Spare a thought for finance ministers, and the opposition counterparts who aspire to replace them. The conventional wisdom was that they should at least make an attempt to follow fiscal rules. Now, there are no rules.
Some Humility is in order for years of austerity
My letter in the Financial Times on the need for a framework for economic policy decision-making.
Fixing The post-Covid economy
Responding to Brian Griffiths' article in The Article on the risks of inflation.