Only Abba can save the world financial markets

08 October 2008

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Martin Vander Weyer says that the collapse in the markets reflects a loss of confidence that is out of proportion to all reason: a trip to Mamma Mia! is the answer to this hysteria

What I do mean is that gibbering fear on the part of the people who move markets is now driving this crisis towards consequences that no one could seriously have foreseen. Tired of listening to financial pundits on Tuesday night, I asked a psychotherapist what she thought was the root cause: ‘This isn’t a fashionable word in my profession these days,’ she replied, ‘but it’s pure hysteria.’

And the measures needed to restore sanity, we agreed, have more to do with mass psychology than with any textbook of central banking practice. What matters is what works, not what reinforces the principle of moral hazard or follows any particular ideology. To accuse politicians of dithering is unfair when the condition they are trying to treat mutates wildly day by day. There are precedents for this situation, but they are not the most talked-about ones of 1973 and 1929. To me (because I happened to be there at the time) it feels more like post-Soviet Eastern Europe, in the early months when bankers like me, as I was then, and economists and newly elected politicians were thrashing around trying to invent ways of kickstarting moribund economies and giving citizens a stake in them. Often you would hear the old joke about an Irishman who is asked for directions by a tourist and replies, ‘Well, if I was you, I wouldn’t start from here.’

Right now, the free world’s banking industry is in much more urgent need of kickstarting than, say, the Czech steel industry in 1991. But the similarity is that you wouldn’t want to start from here, that any positive idea is worth considering, that big, bold schemes are more likely to work than small, footling ones, and that well-phrased, comforting speeches made no difference at all. That line of argument has led experts latterly to reconsider a more direct precedent — cited in these pages last month by our own expert, Sir Martin Jacomb — which was the muscular, hands-on solution to the early 1990s Scandinavian banking crisis. There the Swedish government issued a blanket guarantee on deposits, nationalised some banks and injected capital into others, and swept bad loans into a special-purpose bank which gradually realised the underlying assets and minimised the loss to Swedish taxpayers. Banks which recovered were eventually returned to the private sector. It worked so well that many people forgot it ever happened.