This Crisis is Far From Over
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Is it safe to go back into the markets now? Investors certainly seemed to think so. Markets in the UK and Europe, reacting belatedly to news that JPMorgan was going to bid a whole $10 a share for Bear Stearns, instead of $2, soared yesterday. Here in the UK, news the HBoS directors had piled into the bank’s shares following last week’s panic also helped bank stocks higher.
The FTSE 100 jumped a whopping 3.5% to 5,689. It’s now fallen a mere 11.9% in the past 12 months.
So was that the bottom? Somehow I don’t think so…
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The rebound in markets yesterday seemed like yet another short-term rebound before the next bout of bad news. None of the problems underlying this crisis have gone away. Let’s look at what’s been happening. Yesterday we heard that US consumers are feeling more grim about their economic outlook than at any time since Richard Nixon was in the White House in 1973. “Obviously, this is a recession signal,” said Lynn Franco, research director of the US Conference Board, which issues the data.
Meanwhile, according to the Case-Shiller Index, house prices in the 20 largest US cities fell by 10.7% in January, compared to the year before. Prices in Miami were down 19.3%. Around 9m Americans are now in negative equity, reports Ambrose Evans-Pritchard in The Telegraph.
Should the Bank of England be doing more?
And this morning, The Telegraph reports that banking giant Citigroup has been criticising the Bank of England for not jumping in to save the UK economy. Three-month Libor rates are rising again (this is one of the key rates at which banks lend money to each other). The fact that it’s near 6% compared to a base rate of 5.25% is one of the main reasons that mortgages are getting so expensive, in case you’re wondering.
“The Bank of England should now be adopting a more determined approach to easing financial market strains… The UK money markets have become dysfunctional,” said Citigroup’s Michael Saunders. “They still seem to be concerned about moral hazard, but we are long past that.”
Tim Bond of Barclays Capital adds: “The reason why we had a bear raid on HBoS last week is because people question whether the Bank of England is there to backstop the system.”
Well, that’s an interesting view. It strikes me that what Mr Bond is saying here is effectively that we wouldn’t have seen a bear raid on HBoS as long as everyone in the market believed the Bank of England would keep it from harm. Try substituting HBoS for Marks & Spencer here and you see the problem. “No one would have sold that retail stock if they’d realised the Bank would buy up all its pants and socks if the worst came to the worst.”
I hate to say this, but if banks expect to be saved by the Government (ie, the taxpayer) when they collapse, then they should equally expect to be tightly regulated by the Government during the good times. If we effectively underwrite their profits, then we should expect to share in them too.
Banks are not too important to fail
As Jeff Randall points out in The Telegraph today, bankers love market forces when they’re happening to other people. “After all, job losses = cost reductions; company insolvencies = sector consolidation; falling prices = buying opportunities.” But when it happens to them, there’s a “chorus of calls for taxpayers’ funds to rescue distressed lenders.”
Now, the idea of more regulation is instinctively not something I like. A better solution might be to strip government intervention out of the market altogether. After all, as I pointed out yesterday (see: Who’s really to blame for the financial crisis? http://www.moneyweek.com/file
Not anymore. And so the banks and the markets sit back and expect the central bank to do whatever it takes. Perhaps if we’d allowed a few more of the past ‘crises’ to inflict some pain, we wouldn’t find ourselves in this situation now. As for what we can do – well, any bail out is still going to hurt. Japan didn’t let its banks go bankrupt, and look what happened there. I suspect we might be looking at a similar scenario in the West – let’s just hope we’re not still waiting for it to turn around in two decades’ time.
Source: Don’t be fooled by the bounce – this crisis is far from over
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Tags: credit crisis, recession, subprime, US stocksAbout the Author
John Stepek is Deputy Editor of the UK-based financial weekly MoneyWeek. He is also the editor of daily investment email Money Morning UK. John graduated from Strathclyde University in 1996. He has worked for a number of financial magazines and newsletters including Families in Business, Shares Magazine and The Sunday Times.