By the time you read this, we will know if the blood flow on Western financial markets has been stemmed or is gushing unabated. Indications from Asian markets are not good with losses and falls recorded. At one point, the Australian index dipping below 4000 and the Shanghai index dropped several percentage points in minutes. It may be a knee-jerk reaction to the losses sustained on the US Dow and British FTSE last week but as one analyst in Australia indicated: “no one really wants to wait around and see how the US market reacts tonight”.
Feeding frenzies tend to be circuitous and the Western markets are therefore likely to react badly to the nervousness displayed in the Far East. “Calming words from the ECB, or the Fed Reserve or a decisive policy response is what the market most yearns for at the moment.” It remains to be seen if the pledge uttered by G7 leaders to do what ever it takes to stabilise markets provides succour for nervous traders.
But I am always amazed at how excited everyone gets over volatile market trading and how the behaviour of the markets seems to matter so much more than other economic indicators. For months now, I’ve been puzzled at their apparent buoyancy on the back of very poor economic conditions in the UK, across Europe and in the US. Flatlining growth, high unemployment, continued high levels of government indebtedness – none of it mattered a fortnight ago so what has changed?
Perhaps the realisation that no one has a scooby what to do and how to do it has finally dawned. Capitol Hill playing blackjack with US economic fortunes spooked everyone, anodyne assurances from European political leaders and a sticking plaster from the Eurozone to the Greek situation all serve to show that there is a distinct lack of political leadership and solutions to our global economic woes. We continue therefore to be at the mercy of the masters of the universe, whose demise following the 2008 financial crisis was clearly only temporary.
How can a handful of people continue to hold national and international economic fortunes to ransom by they way in which they play the markets at any given time? And why do we stand to attention when they do?
Why is it that Spain with high unemployment, slow growth but relatively low indebtedness is seen as a much worse risk financially than the UK whose growth is slower and indebtedness much higher? Our youth unemployment levels are no way near as high as Spain’s but they are nudging ever upwards. And how is that Italy, which if it were a business would be bankrupt with its debt levels outstripping its wealth, has got away with it for so long?
Sometimes you cannot help but wonder if they make it up as they go along, particularly as there is no consensus amongst economists as the right and wrong way to address the ongoing crisis and turn Western nations’ economic fortunes around. What does appear to hold true is belief in the old neo-liberal, free market oriented policies that got us into this mess in the first place. Thus, the UK is managing to keep its head above water because it has embarked on an asset stripping exercise in the public sector, to get spending down. That apparently is good, ignoring the fact that countries like Sweden with high taxation and high public spending are treading water much more effectively right now. The lack of a plan from the UK government for economic growth does not appear to worry those that cast the runes, believing as they do that the markets can fix it all.
And at the heart of it all lie the banks. The cause of all this chaos. Nation states are failing economically because in 2008 we taxpayers took on all their toxicity and bailed them out. And three years on, nothing has changed. They still behave the way they also have. On Friday, the Royal Bank of Scotland reported a half yearly loss of £794 million. It means that in the first six months of this year, the bank lost £794 million of our money through injudicious trading, investments and business. What is remarkable is that last year, apparently it made over £1 billion in profit. How does that work? How can such a big institution in the space of months go from making money to losing it so spectacularly? And one wonders what must a banker – over 100 earned over £1million in bonuses in 2010 each – do to stop being rewarded for failure?
Apparently, the loss has been caused by writing off £733 million of Greek debt and having to put aside £850 million to compensate customers who were mis-sold payment protection insurance. Both reasons are quite astonishing for a bank that is 83% owned by taxpayers, for it is our money they are gambling with. Ironically, all those with a successful PPI claim will only be getting back their own money. And one wonders what on earth a state owned bank is doing buying government bonds in one of the riskiest economies in Europe. Money would appear to be easier to gamble with when it isn’t your own. When the bailout was announced, markets were reassured that the UK government would be a hands-off investor, taking no part in the day to day running of the bank. Time for that decision to be reversed I’d say.
Iain McWhirter was one of a very few commentators this weekend to offer a solution; in the Sunday Herald, he called for a reversal of current profits: wages ratios and suggested raising taxes was the best way to put money back into the hands of consumers. No doubt he will be lambasted for his economic illiteracy but it sure made a lot of sense to me. But as he pointed out, where is the politician brave enough to challenge current economic orthodoxy and propose such measures?
Meanwhile let’s make do this manic Monday with a pithy summary of the global economic scene from JP Morgan – “No leaders, no bullets, too many blanks”. Reassuring it ain’t.