Bankers poised to
avert Wall Street crash
By Diane Coyle Economics Editor
Officials from the Group of Seven
leading economies hold an
emergency meeting in London today
with one item on the agenda: how to
respond to the crisis that toppled the
South-east Asian tigers a year ago,
reached Russia this summer, has just
landed in Brazil and now looks
certain to knock on to us. Leaders of
the Western world have decided it is
finally time for action.
A likely outcome of today's meeting
is an agreement that the G7 central
banks will stand poised to
co-ordinate a reduction in interest
rates if - when - Wall Street crashes.
In a desperate measure last week the
Bank of Japan took its already low
interest rate closer to zero. But
traders in the financial markets now
expect both the US Federal Reserve
and the Bank of England to make
borrowing cheaper, keeping a head
of steam under the US and UK
economies and helping out the banks
being hammered by losses on their
loans to Asia and Russia.
Alan Greenspan, the Fed chairman,
went out of his way in a recent
speech to indicate that he stood
ready to lower US rates in response
to the world crisis. Last week, after
its decision not to cut loan rates just
yet, the Bank of England issued an
unprecedented statement that it
would be monitoring the risks
closely. The markets read this as a
signal that it might step in before
next month's formal meeting of its
Monetary Policy Committee.
While many critics would argue that
the G7 response has come not a
moment too soon, something has
happened to make the authorities
seriously worried. That something is
that for the first time the turmoil in
emerging markets seems likely to
darken the economic outlook in the
West. President Bill Clinton, for one,
will fear repercussions of a
slowdown or recession after seven
years of healthy growth. European
politicians do not want to launch the
euro in three months into the stormy
seas of a world financial crisis.
For all the panic last year about the
effect of a slump in Asia on the
West, it was never likely to be very
big. Individual companies have
suffered a loss of exports but the
scale of US and European trade with
Asia was too small to do much
damage to overall growth rates. Even
adding Russia to the calculation
would not necessarily have resulted
in serious economic damage to the
West if stock markets in New York
and London, Paris and Frankfurt,
had not caught the contagion. There
has been no big crash yet, but there
might be, and share prices are
already well down this year.
American jobs depend on Wall
Street because the long US boom has
been increasingly fuelled by
consumer borrowing. The American
savings rate has dropped to zero,
give or take a decimal point or so.
Why save the old-fashioned way
when the paper value of your mutual
fund investments in shares, or your
executive stock options, have made
you wealthy? So, in contrast to the
1987 crash, which was followed by a
boom, a 1998 one could spell bust.
And bust for the US means the same
for the UK and the rest of Europe. If
market rumours that some big
investment banks are in danger of
failing are true so much the worse.
Struggling banks withdraw credit
from good customers as well as bad
ones, and there are clear signs of a
"credit crunch". At the start of this
year Eddie George, Governor of the
Bank of England, told The
Independent that the world financial
system already faced its most serious
crisis since the Latin American debt
crisis of the early 1980s. By now, it
is clearly the worst since the early
1970s, and the gravest most of the
current generation of officials and
politicians have had to tackle.
Yet, contrary to the conclusion
drawn by some hopeful pundits, this
crisis does not draw down the final
curtain on global free-market
capitalism, in a neat symmetry with
the end of Communism nearly a
decade ago. While capitalism itself
will survive, the argument goes,
Anglo-Saxon triumphalism has had
its come-uppance as the financial
turmoil proves that one size of
capitalism decidedly does not fit
all.In fact, the crisis demonstrates
exactly the reverse.
America is the last country on earth
to be affected by a crisis that has
snowballed precisely because other
nations have not imitated America
well enough. Any country that wants
the benefits of membership of the
club of advanced economies is, it
seems, going to have to turn itself
into pretty much a carbon copy of
models that range from the
Anglo-Saxon all the way to the
German. (There is a big
question-mark over the Japanese
version.)