(fwd) Bankers poised to avert Wall Street crash

tmsa at ibm.net tmsa at ibm.net
Sun Sep 13 23:29:41 PDT 1998

forwarded from the Independent of London, 14 Sept. http://www.independent.co.uk/

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


More information about the lbo-talk mailing list