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Are markets becoming part of the problem?

Martin Vander Weyer wonders whether 'City spivs' are responsible for the current economic turbulence.

9 January 2008

10:41 AM

9 January 2008

10:41 AM

‘Should we blame it all on City spivs?’ I asked a managing director of a famous investment bank at a pre-Christmas party.

He had just told me – with the smile of a man who can look forward to yet another seven-figure bonus in a few weeks’ time – that his firm was still doing very nicely thank you. It was doing so, he continued in the same breath despite the fact that the economy was going to hell – and his forecast for the state of the nation’s, rather than his own, wealth in 2008 was as startlingly downbeat and bluntly phrased as any I have yet heard in this winter of doomsaying. Adapting the famous words of the senior civil servant Sir Richard Mottram at the time of the debacle over ‘burying bad news’ at the Department of Transport on the day of 9/11, my banker friend said: ‘I’m f***ed. You’re f***ed. We’re all completely f***ed.’

I blinked, and decided to press home my killer question. Were we all in this unfortunate state, I asked, because of the stupidity of politicians and the feeblemindedness of central bankers, or the folly of over-borrowed homebuyers and consumers on both sides of the Atlantic, or the unalterable tide of long-term economic cycles, or the whims of 21st century weather and harvests. Or was it down to the action of what I undiplomatically (but deliberately, to get a rise) called ‘City spivs’?

Any complete answer to that question would of course seek to attribute blame judiciously between all the factors: in short, house prices always fall after a long rise, people always borrow more than is good for them if offered attractive credit, bankers always lend more than is wise when the going looks good, politicians allow all that to happen because it creates the feel-good factor that gets them re-elected, and Alan Greenspan of the Federal Reserve should take a slice of the blame for making money so cheap in the first place. But what I was aiming at with the barb at the end of my question was this: I have a nagging feeling, this time round, that the damage done by all the other factors in the economic equation is being magnified by the actions of traders and investors in a way which has never really happened before.

Markets are generally good things: they squirt capital in the directions that it is most needed; they allow real-world operators to protect themselves against financial risk; they are the self-lubricating mechanism without which the wheels of globalization could not spin. But they also stand accused, nowadays, of becoming too sophisticated and complex for their own or anyone else’s good.

Symbolic of all this is Richie Arens, the hitherto-unknown local (that is, one-man band) trader on the New York Mercantile Exchange who celebrated the New Year by bidding $100 a barrel for 1,000 barrels of crude oil, thus losing himself $600 on the day while seeing his name in lights all over the world as the first person to pay the historic three-digit price. The fact that oil has tripled in price in the past four years is, as every schoolboy knows, a reflection of soaring energy demand from China and India, political uncertainty in the Middle East, and a failure on the part of oil-producing countries and multi-national companies either to invest sufficiently in new production and refining facilities or simply to open the taps when politely asked to do so by their customers. But those real-world factors have not altered the supply-demand balance in such a way as to cause the price to multiply by three: speculators – from giant hedge funds to tiny day-traders like Mr Arens – have done that, by chasing the ‘oil-up’ story, via all manner of instruments and traded funds and derivatives, as hard as they can.

Apparently the post-industrial west is now so much more efficient in its use of energy that $100 oil is not an instant signal for recession, as its inflation-adjusted equivalent would have been 25 or 30 years ago. What’s more, optimists and environmentalists (usually to be found in opposite corners) agree that higher prices for fossil fuels can be a good thing if they promote greater interest and faster investment in clean, renewable energy technologies. But however we search for the bright side of $100 oil, it clearly carries huge negatives: inflation in domestic fuel and heating costs with knock-on effects in all other areas of consumer spending, a radical change in the economics of any business for which transport costs are an important factor, a giant transfer of wealth to some of the most unpalatable regimes in Africa and the Middle East.

Oil is just one of many examples in which, I fear, the market itself is becoming more of a problem than a solution. Perhaps ‘City spiv’ has too harsh a connotation, but the over-sophisticated, over-confident City trader, so pleased with his power to move prices that, like Mr Arens in New York, he does so at will, just to see what they look like on the screen, is as dangerous as any egomaniac politician or crazed jihadist.

Did my banker friend agree? ‘Oh no,’ he replied smoothly, ‘You fellows always blame the City just for doing its job so well. And frankly, we always blame you journalists.’   

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