Latest rout a reminder recovery will be a slog
By Richard Beales
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Contrary to the chatter, slumping financial markets aren’t a repeat of 2008. The action, though alarming, is more like a belated recognition that unwinding the rest of the pre-crisis excesses will take years. Politicians may have made the aftermath of the crunch less bad. Now they need to avoid action that makes things worse.
One underlying cause of the crisis three years ago was the giant bubble in the U.S. housing market with its associated towers of subprime mortgage bonds and vaporous collateralized debt obligations. That emperor’s nakedness was exposed long ago, and there isn’t another with comparable dimensions or shock value in view.
Though leverage is still a problem — with sovereign nations like Greece, Italy and even the United States under scrutiny — it has become much less of one in the financial markets. In the run-up to 2008, for example, investment banks sometimes borrowed $30 for every $1 of capital, and even the average hedge fund was leveraged perhaps five to one. Those numbers have fallen sharply, and lenders are now less reliant on commercial paper and other short-term funding. Hedge funds also learned the liquidity lesson; and directionless markets of late mean that big, riskily unhedged bets are relatively scarce.
The U.S. housing market is, however, still weak, and Western sovereign debt problems continue. Friday’s better-than-expected U.S. jobs report did fleetingly stabilize stocks after Thursday’s 5 percent drop in the S&P 500. But American job creation and economic growth are still running below par.
It’s not an encouraging picture, even if U.S. companies are on average reporting 12 percent earnings growth for the second quarter. And policymakers seem determined to make it worse. Congress delivered a half-baked solution to a self-inflicted debt ceiling problem, and the cacophony of political voices in Europe gave Greece another dose of oxygen but did nothing to attack its unsustainable debt load. Italy’s Silvio Berlusconi this week blamed speculators for his country’s problems — an unwelcome echo of the mea non culpas emanating from Wall Street three years ago.
Huge interventions by the Federal Reserve, the European Central Bank, the Bank of Japan and others may have helped soften the downturn after the bubble burst in 2008. But monetary policymakers are out of puff, and fiscal ones are largely out of money. Further politicized half-measures and posturing will make the recovery even more uncertain; if elected leaders can’t make tough decisions, better to stay out of the way and talk plainly about the slog ahead.