‘Nobody rings a bell at the bottom of the market,’ says an old adage in the investment world — and anyone who thought they had already heard a distant peal signalling the low point of the current financial crisis has been proved woefully mistaken this week.
Some stock-market investors, for example, had begun to feel that blue-chip equities looked attractively cheap in relation to historic dividend yields. But now, one after another, and on both sides of the Atlantic, major companies are slashing dividends or abandoning them altogether: in some cases as a matter of urgent necessity, in others as a matter of opportunism at a time when yields on alternatives such as cash deposits and government bonds are at rock bottom. This sudden fashion for dividend cuts renders historic yields meaningless. Amid the continuing gloom, it has helped drive share prices down to levels not seen since the mid-1990s.
Yet again the interests of prudent savers, investors and pension-holders are being brutally sacrificed on the grounds that we must all must make sacrifices to avoid a new Great Depression. That is little comfort to the voter approaching retirement age who is now wondering whether he or she will be able to make ends meet — and why ministers permitted Sir Fred Goodwin to trouser such an offensively huge pension deal.
Yet the threat of depression is real enough: its gravity was brought home this week by yet more bad news, reminding us that we would be foolish to assume that we have heard the worst. Just when it seemed nothing could top Royal Bank of Scotland’s losses for last year of £24 billion, the American insurance giant AIG announced losses of £44 billion for a single quarter — including huge write-downs in the commercial property sector, in which there is clearly a great deal of trouble still to come. Meanwhile HSBC, regarded as the most cautiously managed and best capitalised of Britain’s large commercial banks, revealed that it needed a rights issue of more than £12 billion to stand a chance of retaining its image — and proceeded to slash its dividend.
And so the economic hurricane rages on. As a backdrop to the first meeting of President Obama and Gordon Brown in Washington this week, the situation was extraordinarily grim — but the only realistic expectation is that it will get grimmer before it gets better. The two leaders spoke warmly of a meeting of minds and a commitment to global action. But they did so in the knowledge, first, that pressures within the US Congress and in continental Europe — not to mention from Brown’s own rhetoric of ‘British jobs for British workers’ — are towards economic nationalism and protectionism, with little more than lip-service paid to international co-operation.
And secondly, they boldly declared their joint determination to turn the economic tide, knowing that nothing that governments and central banks on either side of the Atlantic have done so far — the bail-outs and nationalisations, the fiscal stimulus packages, the near-zero interest rates — has made any positive difference to the day-to-day lives of the mass of their electors: job losses, bankruptcies and the destruction of savings continue apace.
Obama is only a matter of weeks into his job, while Brown and the former US Treasury Secretary Hank Paulson would claim that their bank rescues last autumn averted an unknowable cataclysm. And the leaders of all the industrialised nations that have taken actions of this sort can (and do) insist that fiscal stimuli and rate cuts always take months, rather than weeks, to work their way into the economy; nevertheless, as the Governor of the Bank of England has said, they can generally be relied upon to have some positive impact eventually.
But nothing is certain and patience is wearing thin. The experience of Japan, where industrial output is now plunging at a precipitous rate despite long application of all these measures, shows that the remedial science is slow to work even in relatively normal recessionary circumstances. And the degree of its efficacy is entirely dependent on the scale of the financial folly that preceded it, and the strength of global market forces ranged against it.
The factors working against notional recovery measures today are very powerful indeed. Accordingly, governments everywhere look ineffectual — and need to find a tone which delicately combines humility in relation to past misjudgments and regulatory lapses with resolute confidence (but not overconfidence) in the measures they are now taking. Mr Brown has singularly failed to find that tone.
They should also desist from the practice of scapegoating to distract public attention from the bigger picture. We have heard quite enough from politicians on the subject of Sir Fred’s pension, an issue which reflects at least as badly on the incompetence of the Treasury team responsible for the taxpayers’ investment in RBS as it reflects on Sir Fred’s conscience. It is hardly a trivial issue, but it is cynically being used as a smokescreen.
There is a chance that Barack Obama’s eloquence, his capacity for personal empathy and his freedom from responsibility for his predecessors’ errors will enable him to rise above the smoke of domestic politicking to address the big-picture challenge. But that is only a part of the picture, and little comfort to British voters who are truly beginning to feel the pain of this downturn. Seeing President and Prime Minister sitting side by side this week was a grim reminder of the PM’s shortcomings: his pathological refusal to admit mistakes and his delusion of omnipotence in the financial sphere make him peculiarly unequal to the historic task in hand. If there is a bell tolling in the distance, it is not yet the signal of economic recovery; it is the bell that tolls for Brown’s time in Number 10.
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