Saturday, October 11, 2008

Bipolar Banking? Analysing the Money Markets

I'm not sure I agree with the Pope.

"We see it now in the collapse of the great banks that money disappears, it's nothing," he remarked earlier this week. I'm sure he'd have been just as chilled if St. Peters Rome (completed with the money raised by selling time off purgatory to medieval peasants), had collapsed. The moral he drew was that God is more dependable than money.

But this isn't a crisis of money, it's a crisis of faith. 5 live's phone-in yesterday morning included Kriss Akabusi, who reminded us what we already knew, that the word 'confidence' comes from the Latin for 'with faith'. (You didn't? Me neither)

Market Mentality
Look at the language people are using: 'the main emotions are panic and fear' (Times) 'uncertainty and fear' (George Bush) 'panic, fear, frenzy' (Telegraph), 'brutal...riot...chaos' (Wall Street Journal: bit more macho). What's striking is that most of it is psychological language. The crisis is not quite 'all in the mind', but it's close. The talk is about rebuilding confidence - without confidence the market won't stabilise, but until the market stabilises people won't have confidence. Oops.

If you had to compare the graph of any banking share over the last 12 months to a mental state, it would be manic depression. The manic phase: overpricing, fuelled by reckless borrowing, has turned almost overnight to a spiral down. Take HBOS: somewhere between £12 and £1.20 is (shareholders hope), the true value of the company. But it doesn't change that quickly over 18 months.

One thing I admire about Alastair Campbell is his openness about his depression, of which there is more in a documentary tomorrow. Our financial markets are cracking up too. Unfortunately, being in a room full of 1000 other panicking people doesn't make it easy to stop panicking. Just as modern life is toxic to mental stability, so is the stock market.

I remember those neat little charts from economics 'O' level (GCSE for you young 'uns), which made market behaviour look oh so scientific. The worshippers of the free market maintain that the market system itself is fine, but after the last few weeks, that belief seems increasingly psychotic (= loss of contact with reality). Whilst the real economy grinds slowly into recession, share prices cry 'look at me' as they jump from a cliff. The Gadarine swine, who hurled their demon-possessed porcine bodies into a lake from a cliff-top, are the closest biblical metaphor.

Medicating the Market
So who will cast the demons out of the pigs? The challenge is at least as much a mental one as an economic one: what will trip the psychology of the markets into an upswing, or, at the very least, boring old stability? What is the seroxat for stock markets? We have the talking cures (one a day from George Bush), and a sizeable one-off financial pill, but every depressant knows that medication works -when it works at all - only when you take it regularly over the long term.

What is the long term medicine? Gordon Brown, speaking on Monday, outlined a moral solution:
"My values, the values of the country, celebrate hard work, effort, enterprise and responsible risk taking - qualities that markets need to ensure that the rewards that flow are seen to be fair....And that is why we back the work ethic; we support effort and enterprise and responsible risk-taking. These are the morals markets need."

So the problem, according to Brown, is irresponsibility, lack of trust etc., and the solution is a more robust moral code for the markets.
Just in case we hadn't got it, he said the same thing again on GMTV on Thursday: "I am angry at irresponsible behaviour. Our economy is built around people who work hard, who show effort, who take responsible decisions, and whether there is excessive and irresponsible risk-taking, that has got to be punished."

That's all well and good: markets without a moral foundation don't work. If there is no trust, integrity, honesty etc. then there is no basis for open trade and commerce. But is that enough? Will it stop the kind of speculation and herd psychology which drives markets over a cliff? And if not, what's the alternative?
This is the way the world ends, not with a whim, but with a banker.
(ht) We don't know if global 21st century capitalism can survive without epidemic levels of borrowing, because we've never tried it that way before. But we do know if we don't try a different way, there won't be a globe full stop. Like it or not, global recession is the only sure-fire way to reduce our carbon footprint.

It's too soon to tell whether we'll look back on autumn 2008 as the beginning of the madness, or its end: the final dash to a watery grave of an unbalanced and unsustainable system. How's the patient, nurse?

(cross-posted from Touching Base, a weekly column at the Wardman Wire)

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