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Finger-pointing frenzy won't deliver the fix nations need

Everyone loves a scapegoat. And when markets go berserk, as they've done once again this week, the easy targets are identified. As a journalist, you become accustomed to being held responsible for everything from the apartheid regime's troubled final decade in South Africa, unrest in East Timor and bias against the government and opposition.

Everyone loves a scapegoat. And when markets go berserk, as they've done once again this week, the easy targets are identified. As a journalist, you become accustomed to being held responsible for everything from the apartheid regime's troubled final decade in South Africa, unrest in East Timor and bias against the government and opposition.

While reporters often cop flak for "sensationalised" reporting of global market meltdowns, the real pariahs held up for ridicule and public flogging are irresponsible hedge funds, bond market mavericks, unscrupulous stockbrokers and greedy investment bankers.

There's no doubt they can play a key role in market upheavals, as the events leading up to the American property market meltdown and the onset of the global financial crisis attest.

But in most market meltdowns, and particularly this latest crisis, far deeper issues are at the heart of the problem.

At various crucial points during the past two years, in what is shaping up to be the slow unravelling of the European Union, various political leaders have pointed the finger at bond market traders who have relentlessly attacked the debt securities of Greece, Italy, Spain, Portugal and Ireland.

There have been attempts to rein in the traders, to curb their activities and place limits on the selling that has pushed bond yields to new highs, initially in Greece and this week in Italy, that all but ensures those governments cannot borrow new funds.

Attack is generally considered to the best form of defence. And throughout this long saga, it has worked to varying degrees, taking the heat off those who caused the problem.

But if the financial markets, and those who work in them, are guilty of anything, it is simply their role in highlighting those deep underlying problems and forcing those in control to deal with them.

In the case of Europe, the real culprits are the politicians and bureaucrats who cooked the books and borrowed well in excess of agreed limits but managed to conceal their activities with the help and assistance of those ever inventive investment bankers.

So intertwined and so complex is the problem, there appears to be almost no solution.

If it was simply one rogue state, then it could be expelled from the EU, be forced to revert to its heavily devalued currency (in Greece's case that would be the drachma) which would then enable it to become more competitive and allow it to trade its way out of trouble.

Greece, however, is so hopelessly indebted that if it were forced out the EU, it would certainly default, plunging Germany's and France's biggest banks and a host of other European majors into chaos.

That's why Europe's leaders have been desperately attempting to muddle their way through this. They've been trying to avoid a full blown banking crisis.

Do financial markets matter? There's a legitimate argument that says they don't that they only have a superficial impact on the real economy and that production and trade are far more important.

Proponents of this school of thought argue the 1929 crash did not cause the Great Depression and the 1987 crash did not lead to the recession of the early 1990s.

According to the theory, it was the policy decisions taken after these events that led to the economic slumps that still scar our collective memories.

There's a logical elegance to this argument that is hugely compelling. But it ignores one vital element - that financial markets aren't mere barometers, they involve real people's savings.

And the psychological impact these upheavals have on consumer and business confidence affect investment and the real economy.

When markets are running hot, consumers, investors and businesses are lulled into believing that they are wealthier than they really are. Everyone spends more, borrows greater amounts and invests in the belief that the good times will never end.

Often there is no easily discernible factor that sparks a crash, just a collective realisation that the emperor really has no clothes.

And when markets slam into reverse, the opposing forces exacerbate the effects on the real economy. Consumers spend less and save more, businesses shore up their balance sheets and the grandiose takeover plans of the boom years are put on ice. Confidence and fear become self-fulfilling prophecies.

These days, the effects are further highlighted by the almost universal involvement of consumers and wage earners in the stockmarket.

In Australia particularly, compulsory superannuation has tied our individual future wealth directly to the fortunes of the financial markets and the diminishing pot of superannuation cash has a sobering effect on consumption plans.

Almost every major stockmarket crash in the past century was preceded by a period of poor lending practices, where banks have lowered their standards in a race for market share and/or earnings growth.

Financial market deregulation in the early 1980s pushed asset and stockmarket prices to unsustainable levels in 1987, resulting in Wall Street's infamous Black Monday. But the recession didn't bite for three years as American authorities pumped cash into the system in an effort to stave off the unavoidable.

The similarities to the current predicament are eerily familiar. For the past three years, ever since the American property market blew up after a bank-fuelled lending binge, US authorities and their European counterparts have done their best to stave off the inevitable.

They have cut interest rates to zero, printed vast amounts of new money and shoved it into circulation to artificially kickstart the economy and debase the value of their currencies. That way, they figure, they can inflate their way out of trouble.

But therein lies the rub. Those policies may have had a chance if not for the monumental levels of government debt throughout the developed world.

America's military excursions into Afghanistan and Iraq, combined with tax cuts, have left it bereft of any real monetary might to battle the economic calamity at home.

The EU, meanwhile, is barely holding together as it lurches from political to economic crisis.

Faced with the prospect of social upheaval on an unimaginable scale, the econocrats and politicians across the northern hemisphere are doggedly attempting to spend their way out of the woods with money they simply don't have.

And the financial markets, sniffing defeat, continue to belt away at debt-laden states, to force the crisis to a head.

Who's to blame? Who cares. It is time for a workable solution.


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