Step back, and look beyond the panic
October 11, 2008
What matters is not the selling frenzy, but the health of the real economy.
IN THE metaphors lies the truth. Yesterday, reporters tracking share values in Australia and around the world declared that the markets had tanked, cratered, careered and were generally on a wild ride to the bottom. The images were either of a receptacle being rapidly depleted, a vehicle spun out of control, a berserk beast, or some combination of the three. Which amounts to saying that what happened yesterday, when the value of the Australian market's benchmark index, the S&P/ASX200, fell below $1 trillion, does not have a rational explanation. It was blind panic.
And the contagion had spread here from abroad. In New York the day before, on the busiest day in the history of that city's stock exchange, fearful investors had sold, sold, sold, just as they did on the two preceding days. In the past six trading days, the New York Stock Exchange's main index, the Dow Jones Industrial Average, fell 20.8%, a dip regarded as sufficient to mark the beginning of a bear market and comparable to the 22.6% drop on Black Monday, October 19, 1987. Meanwhile, Treasurer Wayne Swan and the other finance ministers of the G20 group of nations were gathering in Washington to discuss responses to the crisis, and urging people to be calm.
In truth, there now seems little that governments and central banks can do that they have not already done. The US Congress agreed to the Bush Administration's $US700 billion bail-out of Wall Street banks, and Wall Street's reaction has been an orgy of selling. In Australia, the Reserve Bank cut rates by a bold 1%, with a similar outcome. And the pattern repeated itself when the US Federal Reserve, the Bank of England and the central banks of the European Union, China, Sweden, Switzerland and Canada did the same. The banking systems of Britain and Ireland are guaranteed by their respective governments, and some of the banks in those countries have been nationalised. There is no liquidity crisis, a shortage of funds, but there is a credit crisis, an unwillingness to lend; and that crisis is fuelled by the same instinct driving the panic selling on sharemarkets. Both are about the loss of trust, without which any economic activity, from the choice of household groceries to investing in a new business, is not possible.
The challenge facing the G20 finance ministers and their governments is that this loss of trust is what they must overcome to prevent the looming global recession accelerating into a full-scale depression like that which began in 1929. Yet investors do not seem to be listening.
Some may think that even mention of a depression is unwise, lest it encourages people to think one is unavoidable. But it is important to be aware of the differences between the Great Depression and the present crisis. Trust was slow to rebuild in the decade that followed the New York stockmarket crash in 1929 precisely because governments were slow to do what they have swiftly done now. The Hoover administration, believing the market to be its own best corrector, did nothing to rescue banks in trouble, and each collapse only spawned greater fear and further collapses. That is not what the Bush Administration and other Western governments have done, and although investors may be ignoring that now, the crucial task of restoring confidence has already begun.
In Australia, the Federal Government has insisted since the global credit crisis began that the economy is fundamentally sound, and it is. Australia's banks are secure, thriving businesses and their prudential oversight and regulation have been much more rigorous than the loose controls applying in the US during the past two decades. The waves of panic selling that have been seen on the Australian exchange in the past week are cause for concern, but they have not yet had a substantial impact in the so-called real economy, the economy of employment and the buying and selling of goods and services.
The prosperity of that real economy has been driven by a commodities boom that, falling global commodities prices suggest, may be ending. The plunging value of the Australian dollar at least in part reflects that perception. But a cheaper dollar also brings opportunities for exporters, including commodity exporters, and the strongest market for Australia's minerals, China, has so far given only a slight indication of slackening interest. Even if the boom is over, it does not mean that it must be followed by a bust.
Panic, like any irrational emotion, will eventually dissipate. What will matter then is that the globally co-ordinated regulatory mechanisms being discussed by the G20 ministers are firmly in place. |
