If Markets Close, The 'breather' Might Set Banks Lending Again

The Age

Thursday October 9, 2008

David Hirst

Governments do not want to repeat the policy errors of the Great Depression, writes David Hirst.

A PRIVATE international teleconference presided over by Pimco chief Bill Gross has raised the possibility of a temporary closure of "markets and institutions" for a day or two to take stock and co-ordinate action as the US Government works feverishly to prevent a depression while events similar to those of 1929 to 1931 unfold.

Speakers at the conference were Gross and his right-hand man, co-CEO and co-chief investment officer Mohamed A. El-Erian. It was watched by hundreds of asset consultants and institutional investors in the Asia and Pacific region.

El-Erian told the conference "the unthinkable outcome" is that the financial markets be shut down temporarily (not including normal banking functions) to address immediate issues.

El-Erian is seen as the anointed successor to Gross as head of the world's largest investment fund. He and Gross called for a co-ordinated response to the crisis in the financial system, which threatens to engulf the corporate sector during the conference.

Gross is known to have regular discussions with US Treasury Secretary Henry Paulson. Fears are rife that the world banking crisis could be a replay of events that led to the Great Depression, which many economists believe was rooted in the international banking system rather than Wall Street.

Policymakers and major money managers are all too aware of mistakes made after the crash of 1929 and are desperate not to blunder down a path of unco-ordinated "beggar thy neighbour" approach. There is talk in high places of closing the markets and financial institutions down altogether for "a day or two" while the US and European governments, the financial sector and key members of the corporate world "catch breath, take stock" and come up with co-ordinated actions that will stop the bleeding and somehow (no one knows how) restore confidence.

The problem is that no one knows whether this will work, no one knows what policies will be instigated and how they will be implemented.

However, the idea is not without merit.

If the international financial community can utilise the mechanisms now in place and present a united front, a determined and aggressive co-ordinated response that could get banks lending again, coupled with an internationally agreed reduction of interest rates that would not see money rushing to a new haven, the markets may settle, stabilise, and then money could start flowing throughout the "body" of the financial and corporate system and bring about a speedy recovery of confidence.

A market moratorium would involve what is being described by Gross, chief investment manager at Pimco, the world's largest bond fund, as "necessary but sufficient" intervention rather than the ad hoc and disparate actions now being taken by countries within the EU that is supposed to be a single financial block.

Nations would need to put aside their disparate objectives and stop the hostility that is emerging as nation blames nation for perceived policy errors, the very root of the issues that prolonged the Great Depression.

The discussions follow realisation the current crisis is no longer a purely financial one. The US is taking a huge risk with its currency by printing more and more money to solve the crisis. There is also a belief that the US is taking all the risks while Europe is squabbling over national issues.

While the US and Britain are working together the divisions between northern Europe and "Latin" Europe are a major stumbling block. The US has guaranteed money markets and made numerous other provisions while Europe has done practically nothing to assist international order.

The fundamental differences between 1929-31 and now are the speed with which this beast is moving. F. William Engdahl argues in A Century of War: Anglo-American Oil Politics and the New World Order that the Great Depression began in May 1931 with a seemingly minor event - the collapse of a bank in Vienna, Creditanstalt. "That bank collapse," Engdahl wrote "in turn was triggered by a political decision in Paris to sabotage an emerging German-Austrian economic co-operation agreement by pulling down the weakest link of the post-Versailles system, the Vienna Creditanstalt. In the process, Paris triggered a series of tragic events that led to the failure of the German banking system over a period of several weeks. The post-1919 Versailles System, much like the post-1999 US Securitisation System, was built on a house of cards with no foundation. When one card was removed, the entire international financial edifice crumbled."

The European banking system is unravelling after a bank failure in Iceland. The EU countries met yesterday to attempt to reach a bail-out plan and the US is desperate that the advanced nations make co-ordinated response. Crucial is an agreement being reached between Germany and the European "Latin" nations of the south.

Protectionist policies adopted by desperate governments are also widely blamed for the depth and breadth of the Depression but an obvious difference between today and the origins of the Great Depression is that the banking crisis came after the sharemarket collapse for we are now seeing the market collapse after a banking crisis.

David Hirst is a journalist, documentary maker, financial consultant and investor. His column "Planet Wall Street" is syndicated by News Bites, a Melbourne-based sharemarket and business news publisher.

© 2008 The Age

Back to News Index | Back to Home