2008-01-29
| Rates | Close | Change |
|---|---|---|
| Oil | 90.87 | 1.01 |
| Gold | 933.5 | 13.9 |
| $ to £ | 1.9869 | 0.0113 |
| € to £ | 1.3440 | -0.0025 |
| $ to € | 1.4783 | 0.0111 |
2008-01-29 FTSE 100, Dow, NASDAQ
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 5788.9 | -80.1 |
| Dow | 12383.9 | 176.7 |
| NASDAQ | 2349.9 | 23.7 |
Time for a new world order
The IMF, the World Bank and UN are increasingly looking like yesterday’s ideas for yesterday’s problems.
Of late, the IMF has been on the receiving end of enormous flak. Where was it when the foundations were laid for the credit crunch? Rewind the clock back to the last crisis but one, in parts of East Asia and in Russia, thanks to the way it dealt with that crisis, its name is mud. Maybe we need a new IMF, and World Bank. Well, in saying that, we are in good company.
If there was one theme that emerged above all others at Davos, it was calls for a new world order.
Gordon Brown was at it, so was George Soros, but perhaps most significantly are the ideas that are just beginning to gain global momentum from an economist called Joseph Stiglitz.
Note that name. If you are not already familiar with Mr Stiglitz, then here is a prediction. This is a name you will hear more and more often over the next ten years or so. For Joseph Stiglitz is increasingly being talked about in the same breath as Keynes. If Keynes was the greatest and most-influential economist of the 20th century, Stiglitz seems to be emerging as the top economist in the world in the modern era.
Stiglitz’s views are not dissimilar to Keynes’. In a recent interview with the Telegraph, while talking about a way through the credit crunch, he said, “As a Keynesian, I’d say the biggest back for the buck in terms of immediate stimulus would be unemployment assistance and tax rebates for the poor.” Actually, in this respect, Uncle Joe’s remedy is not that dissimilar from the $150bn tax breaks recently announced by George W. But, he said, “Set against the magnitude of the problem, even a fiscal stimulus package of $150bn is not going to be enough.”
To understand where Stiglitz is coming from, it is first necessary to recall the crisis that made the IMF so unpopular in parts of the world. The East Asia crisis, the Russian credit crisis, and then finally the collapse of Long Term Credit Management, were, in their own way, just as serious as the crisis reverberating around the world today.
The main difference is this. Back then, banks in the West had poured their money into the tiger economies of East Asia and Russia, creating a bubble, which collapsed. The result was nearly catastrophic for the western banks but, in the end, thanks to the action of the IMF and what Stiglitz calls the “Washington consensus,” it was largely the economies of East Asia and Russia that lost out. According to Stiglitz, in his book ‘Globalisation and its discontents’, some people in that region actually date events with respect to that period, describing something as pre- or post-IMF.
So actually, when we celebrate years of uninterrupted economic growth, of the way the global economy managed to avoid recession in the ’97 and ’98 period, just remember, there was a price to pay and that price came in the shape of major economic hardship in some regions.
This experience has in turn affected the attitude of certain developing countries to western institutions. Take India and China, for example, Stiglizt recently said, “These countries managed globalisation: it was their ability to take advantage of globalisation, without being taken advantage of by globalisation, that accounts for much of their success.”
Stiglitz, who was chief economist at the World Bank in 1990, believes that globalised collective action is required moving forward.
George Soros struck a similar note last week when he talked about the failure of market fundamentalism. He says this idea that markets have a self-correcting mechanism is false; in order to propel the global economy forward in a sustainable way, and to create prosperity for all, governments must act in unison.
As for our Gordon, while talking at Davos, he said he wants to see the IMF become like an independent central bank – and as for the World Bank, he wants it to change and become a bank for supporting environmental projects.
The IMF and World Bank were formed after the end of World War II. Their principal architects were Keynes and the American economist Harry Dexter. Because, at the time, the US had all the political clout, the final make up of the institutions was much closer to what Dexter and the US contingent wanted.
But today, the global economy is so completely different, it is inappropriate for the financial institutions that are supposed to make the global economy tick over to be so dominated by the US and Europe. The boss of the IMF, for example, is always a European, the boss of the World Bank always an American.
Maybe all we need to do is reform the IMF and World Bank a bit. It seems more likely, however, that we need to scrap these two institutions and start again – come up with something new. Here is the prediction. This debate will develop, and within a few years will become a major talking point, and don’t be surprised if that name Joseph Stiglitz comes up on TV and appears in the newspapers more and more often.
2008-01-28- Gold, oil, pound, dollar, euro
| Rates | Close | Change |
|---|---|---|
| Oil | 89.86 | 0.07 |
| Gold | 919.6 | 9.5 |
| $ to £ | 1.9756 | -0.0031 |
| € to £ | 1.3465 | 0.0053 |
| $ to € | 1.4672 | -0.0082 |
2008-01-28 FTSE 100, Dow, NASDAQ
| Index | Close | Change |
|---|---|---|
| FTSE 100 | 5869 | -6.8 |
| Dow | 12207.2 | -171.4 |
| NASDAQ | 2326.2 | -34.7 |
House prices fall again in December – but still too early to call trend
The next round in the UK housing market story began in earnest this morning. Hometrack released its latest set of data, this time for January. It had prices down 0.3 per cent in the month and has now recorded four successive months of price falls. As for the annual rate, it now has this down to 2.3 per cent.
It’s all rather negative, but it’s too soon to say how serious the turn down is just by looking at this data.
From July 2004, Hoetrack recorded 16 months of successive falls, so even during the course of this decade, a period of remarkable house price growth, the current run of declining prices is not without precedent.
Richard Donnell, Hometrack’s Director of Research, talked about how “The short-term outlook for market activity hinges as much around the outlook for UK interest rates as does the outlook for financial markets.” And he said, “Weak confidence among would-be purchasers continues to put downward pressure on house prices although the scale of the recent falls is relatively small when put in the context of gains over the last few years.”
Or to put it another way, stop fretting, the housing market is struggling at the moment, but in the context of the boom we have seen in the last few years, we should still be celebrating the strength of the UK’s housing market.
Then we have Paragon. Paragon specialises in supplying mortgages to buy-to-let investors, and has for some time been one of the most bullish voices in the property industry. And this morning, it was true to form. “Growing demand for rented accommodation has spurred strong growth in rents paid by tenants, contributing to a healthy increase in rental yields and total returns,” it said, and added, “rental incomes rose by 2.5 per cent during the month, bringing the annualised rate of growth to 19 per cent. Tenants are paying on average £965 per month for their rented properties, compared with £808 a year ago.”
Paragon’s big argument is that as would-be first-time buyers choose to rent, instead of buy, demand for rental properties surges, and buy-to-let investors rake in more bucks. There is one snag with this argument. If would-be first-time buyers don’t buy because they can’t afford the mortgage, how can buy-to-let landlords find it profitable to rent out a property to those same people?
Well, there are two answers. Firstly, Paragon talks about how the reason for the fall in first-time buyers has more to do with the desire for greater social mobility. While there might be some truth in that, we all know the real factor putting off first-time buyers is the cost of buying a home.
The other argument is that buy-to-let investors can make a profit from rent, even though the people who pay the rent can not afford a mortgage in the same property, because the landlords can put down bigger deposits.
Or in other words, landlords use the growth in their property portfolio to raise funding, and providing they keep their total exposure below a certain level, they will always be quids in.
This argument would suggest, the more house prices go up, the more buy-to-let investors can afford to invest.
This is, of course, an incredibly dangerous argument – after all, the above scenario seems pretty close to the definition of a bubble.
Maybe, then, for a truer picture of what is going on, we should turn to accountancy group Deloitte. In its latest report, out today, Deloitte predicts a 5 per cent fall in house prices this year and an 8 per cent fall next. It is also predicting the sharpest slowdown in economic growth in 15 years.
Now at first sight that is a very interesting prediction, because it coincides with the predictions recently made by Capital Economics. But then again, look a little deeper and you realise that the man behind the Deloitte report is none other than Roger Bootle, top man at Capital Economics.
Now Mr Bootle is a highly competent economist, but maybe the report doesn’t tell us anything that new – rather it is a slight re-hash of what Capital Economics, arch-bears of the UK property market, have already predicted.
Maybe, though, a more-pertinent report came from the British Bankers Association (BBA) last week.
The BBA recorded the lowest level of mortgages for new-house purchases it has ever recorded. And total mortgage approvals in December were 18 per cent down on a year earlier.
Interestingly, however, December saw an increase in re-mortgages.
It seems that the real key to the economy’s performance and the housing market lies with these re-mortgages. For as long as the re-mortage market is strong, then it must be that home owners are still borrowing their way forward.
If the bottom falls out of this market, which may well happen if we see continuing tighter credit coupled with falling house prices, then things will get very nasty.
The new domino theory
If there is one lesson to be learned from the crisis currently doing the rounds, it is that one set of problems often creates another set.
It’s a little like the domino theory – which once dominated the thinking behind US foreign policy. If one country falls to communism, went the theory, then the country next door might fall. How wrong the theory was when applied to US paranoia over the threat from reds under the bed, but maybe for the economy, this idea has more legs.
In the article above, the story of the East Asia, Russian and LTCM crises was told. Each problem seemed to set off the next. Earlier this decade, the dotcom crash led to a wider stock market crash, which led to the emergence of problems at WorldCom and Enron.
In John Kenneth Galbraith’s seminal book, ‘The great crash of 1929’, a catalogue of disasters was revealed, and bad practice, risky investment strategies, for long hidden because things were so good, unwound.
The formation of bubbles always seems to create more greed. As more and more people want to benefit from the booming market, the longer the boom lasts, the more risk seems to be forgotten.
Actually, right now, we are seeing a big rift emerge between central bankers in the US and Europe. As Ben Bernanke pumps in more money and slashes interest rates, Mervyn King talks about reassessment of risk, something he seems to think is vital.
Earlier this month, KPMG said, “An economic slowdown in 2008 as the result of the credit crunch could result in a rise in the emergence of high-value corporate frauds.”
Last week, Nick Leeson was reeled out as an expert and no doubt, Ewan Macgregor wondered if he could do a passable Jérôme Kerviel impersonation, as the story of Société Générale was unravelled.
The sense of déjà vu with Barings and Leeson is extraordinary – although things could have been a lot worse. Total losses at the bank relating to the saga were £3.7bn, but the bank’s total exposure was nearer £37bn, equivalent to around the total value of assets at the bank.
But, even while we were still shaking our heads, the FT has warned that some holders of derivatives actually want some companies to fail. The FT cited research from academics Henry Hu and Bernard Black and said, “According to the research and industry practitioners, creditors have a strong interest in voting against a restructuring plan if they have bought credit or loan default swaps, which trigger payments when a company fails.”
Warren Buffett once described derivatives as financial weapons of mass destruction – you can see why.
Meanwhile, this morning, the BBC reported how one banker at Davos said, “The consumer credit market will be the next domino to fall after sub-prime mortgages.”
In his book, Galbraith said “To the economist, embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss.”
It seems though, that today, it is not just embezzlement, but we can add fraud, a stunning level of irrational exuberance from money lenders, and who knows what else has been bubbling beneath the surface, and only now is coming to the fore.
No wonder George Soros says markets don’t always work. And yet, in the US, Bernanke, by effectively dropping money from his fleet of helicopters, is dealing solely with the symptoms, and ignoring the underlying problems.
Has the fight back begun?
Just for once it was good news that made the headlines yesterday, markets across the world surged, and analysts were breathing sighs of relief as real evidence emerged that the US may, just may, be getting close to bottom.
Mind you, some of the news that developed yesterday was a funny kind of good news, with analysts, it seems, determined to find silver lining in the darkest of clouds.
For some time we have been saying that the baton has been passed on to Europe. If the US is going to export its way out of trouble, then it’s not really being realistic to assume it can manage this purely on the strength of the burgeoning economic powers of the developing world. It needs to sell more to Europe too, and it needs to see a European-led recovery. Yet there is growing talk that the European recovery is looking increasingly fragile.
Then there’s George Soros, again, he has been talking about the end of a 60-year credit cycle. Is he right?
And finally, Alistair Darling does an about-turn. They used to say Gordon Brown was lucky, well it appears that mantle now applies to his successor. How can he get away with the level of incompetence he has demonstrated over the changes to capital gains tax? Well luckily for him, some of his colleagues in senior government have shown an even-greater level of incompetence, that, for the time being at least, Gordon Brown has no choice but to back his chancellor all the way to the polling booth.
But first, let’s turn to the good news, and read the next article.