Magazine article The Spectator

Talking Recession

Magazine article The Spectator

Talking Recession

Article excerpt

Not long ago it was orthodoxy in the Labour party that the City of London was a parasitic organism, sucking the life-blood of the real economy and run, as Frank Dobson, now Health Secretary, once felicitously put it, by `stinking, lousy, thieving, incompetent scum . Nowadays, of course, Mr Blair's New Model Labour party has succumbed to its own prawn-cocktail offensive and sees the financial services sector as one of the jewels in Britannia's economic crown.

Which is a pity, because those unreconstructed socialists, although misguided, understood a fundamental truth: the stock market and its antics bear only a faint relationship to activity in the rest of the economy. The giddy bull market in shares on both sides of the Atlantic in recent years was whipped up by hope of gain, not economic fundamentals, and the current downturn is driven by an equally irrational fear. As Franklin Roosevelt put it in his first inaugural, in the midst of the Depression, `The only thing we have to fear is fear itself.'

Markets around the world have fallen, with some British blue-chips halving in value within a few months. The crisis began in Asia, where trouble in volatile stock markets spilled over into falling currencies and, as a result, companies defaulted on loans made by Western banks in dollars. International confidence in Asian emerging markets evaporated and investors in other fledgling capitalist economies, such as Russia, panicked. A rolling contagion then spread round the world.

These overseas financial shocks came at a time when the British and American economies, which have been doing well for some years, were facing a slowdown. Industry promptly called on the Bank of England to cut interest rates and on the government to co-ordinate an international package of rate cuts, to prevent the world slipping into a deflationary depression. In Britain, companies pointed out that high interest rates also meant a strong pound, making exporting more difficult.

So far, no interest rate cuts have been forthcoming, but are the Cassandras right to warn of meltdown? The falling stock markets in Britain and America will not affect the real economy unless consumers, watching their theoretical wealth shrink, stop spending. British unemployment, although now expected to rise somewhat, is at an 18year low. Complaints about the strength of the pound ignore the success that German exporters enjoyed for many years despite having one of the world's strongest currencies. The global economy has become more interdependent, but a substantial majority of Britain's trade is with the European Union and the United States, both of which remain economically healthy. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.