Bill Gleeson: Firm hand on the tiller required in choppy waters

Sep 17 2008 by Bill Gleeson, Liverpool Daily Post

WHEN commentators use words like diving, tumbling, plunging and freezing to describe the financial markets, it creates the impression we are helplessly in the grip of a force of nature, but what is needed now, more than ever, is a cool head.

So it is worrying that, right now, what seems to be the top concern of the Government is its own internal power struggle. Frankly, even when he is not distracted, Alistair Darling hardly inspires confidence.

Every day, there is more bad news – inflation hitting a 16-year high, Libor at its highest rate since 2001, not to mention the turmoil in the banking sector. We have all, probably, heard of Lehmann Brothers but, who, if they are honest, really understood what AIG do, other than sponsor Manchester United's shirts. But the talk is, as we go to press, that this could be “the big one”.

Many factors are at play here. AIG is not just any old common or garden insurer. It deals in complex financial derivatives and picking your way through the minutiae of their contracts is more suited to a Philadelphia lawyer armed with a fine toothed comb. Meanwhile, the 30-year Treasury bond yield has dropped below 4% for the first time since the early 1960s. The upshot of all this is that the availability of money in the international interbank market, which was already tight enough in August, is even tighter now.

Money is like any commodity. It’s price goes up when it is in short supply, so don't expect any reductions in UK bank or mortgage rates any time soon, though probably that is just what Gordon Brown is longing for so that there is at least some feelgood factor to the news.

The issue is, inflation is rising, as anyone who has popped into their local supermarket knows. Indeed, inflation is set to get worse, with the 4.7% rate reported yesterday set to rise further in the months ahead.

As a result, the UK is now experiencing high interest rates and rising inflation at a time when economic growth is flat. It is just about the worst possible set of circumstances a Government could face.

The co-ordinated actions of the world’s central banks, which pumped billions of pounds of new money into the system yesterday, should help, but what the markets really need is firmer regulation. Speculators, those that are selling stocks short, should be prevented from doing so. The practice is often associated with false rumours that cause share prices to fall. In times of crisis, short selling, particularly of bank stocks, should be made illegal. As for the Treasury bond yields rising, this can be taken as a clear sign that investors are ditching shares and heading for more secure investments. In financial terms, it’s akin to battening down the hatches. And in a storm, you need a firm hand at the helm, not panic reaction.

ONE group you shouldn’t be losing sleep over, though, are the bankers sacked from Lehman Brothers this week. The average annual pay of Lehman staff is in excess of $300,000. No wonder they were spotted carting out their personal belongings from the bank's Canary Wharf office, not in the usual plastic tub or cardboard box, but in vintage Champagne crates. It’s clear evidence Lehman staff enjoyed the good times while they lasted.

Many of the rest of us could find ourselves reduced to the odd glass of Frascati. The knock-on consequences of tight money and low investor confidence is an even sharper economic slowdown than previously anticipated. Expect to see more jobs to go in the real economy in the months ahead.