Don’t be fooled by the bounce – this crisis is far from over

Is it safe to go back into the markets now?

Investors certainly seemed to think so. Markets in the UKand Europe, reacting belatedly to news that JPMorgan was going to bid a whole $10 a share for Bear Stearns, instead of $2, soared yesterday. Here in the UK, news the HBoS directors had piled into the bank’s shares following last week’s panic also helped bank stocks higher.

The FTSE 100 jumped a whopping 3.5% to 5,689. It’s now fallen a mere 11.9% in the past 12 months.

So was that the bottom? Somehow I don’t think so…

The rebound in markets yesterday seemed like yet another short-term rebound before the next bout of bad news. None of the problems underlying this crisis have gone away.

Let’s look at what’s been happening. Yesterday we heard that US consumers are feeling more grim about their economic outlook than at any time since Richard Nixon was in the White House in 1973. “Obviously, this is a recession signal,” said Lynn Franco, research director of the US Conference Board, which issues the data.

Meanwhile, according to the Case-Shiller Index, house prices in the 20 largest UScities fell by 10.7% in January, compared to the year before. Prices in Miamiwere down 19.3%. Around 9m Americans are now in negative equity, reports Ambrose Evans-Pritchard in The Telegraph.

Should the Bank of Englandbe doing more?

And this morning, The Telegraph reports that banking giant Citigroup has been criticising the Bank of England for not jumping in to save the UKeconomy. Three-month Libor rates are rising again (this is one of the key rates at which banks lend money to each other). The fact that it’s near 6% compared to a base rate of 5.25% is one of the main reasons that mortgages are getting so expensive, in case you’re wondering.

“The Bank of England should now be adopting a more determined approach to easing financial market strains… The UKmoney markets have become dysfunctional,” said Citigroup’s Michael Saunders. “They still seem to be concerned about moral hazard, but we are long past that.”

Tim Bond of Barclays Capital adds: “The reason why we had a bear raid on HBoS last week is because people question whether the Bank of England is there to backstop the system.”

Well, that’s an interesting view. It strikes me that what Mr Bond is saying here is effectively that we wouldn’t have seen a bear raid on HBoS as long as everyone in the market believed the Bank of England would keep it from harm. Try substituting HBoS for Marks & Spencer here and you see the problem. “No one would have sold that retail stock if they’d realised the Bank would buy up all its pants and socks if the worst came to the worst.”

I hate to say this, but if banks expect to be saved by the Government (ie, the taxpayer) when they collapse, then they should equally expect to be tightly regulated by the Government during the good times. If we effectively underwrite their profits, then we should expect to share in them too.

Banks are not too important to fail

As Jeff Randall points out in The Telegraph today, bankers love market forces when they’re happening to other people. “After all, job losses = cost reductions; company insolvencies = sector consolidation; falling prices = buying opportunities.” But when it happens to them, there’s a “chorus of calls for taxpayers’ funds to rescue distressed lenders.”

Now, the idea of more regulation is instinctively not something I like. A better solution might be to strip government intervention out of the market altogether. After all, as I pointed out yesterday (see: Who’s really to blame for the financial crisis?), the reason that banks have come to believe that they are too important to fail is because the authorities have always treated them that way. At the first hint of a crisis, Alan Greenspan cut interest rates, and it always worked.

Not anymore. And so the banks and the markets sit back and expect the central bank to do whatever it takes. Perhaps if we’d allowed a few more of the past ‘crises’ to inflict some pain, we wouldn’t find ourselves in this situation now. As for what we can do – well, any bail out is still going to hurt. Japandidn’t let its banks go bankrupt, and look what happened there. I suspect we might be looking at a similar scenario in the West – let’s just hope we’re not still waiting for it to turn around in two decades’ time.

Turning to the wider markets…

Triple-digit gains for FTSE

In London, investors came back from the Easter break in the mood to buy yesterday. The blue-chip FTSE index added 193 points to end the session at 5,689, and the broader indices were also much higher. HBOS was the day’s biggest gainer, adding nearly 15% on news of director buys.

There were big gains for stocks elsewhere in Europe. The Paris CAC-40 added 158 points to end the day at 4,692 and the Frankfurt DAX-30 closed 204 points higher, at 6,524.

Across the Atlantic, there was no repeat of Monday’s stellar gains yesterday. Good results from agriculture giant Monsanto failed to offset bearish data on the housing market and consumer sentiment. The Dow Jones ended the day 16 points lower, at 12,532. It was a better day for tech stocks, with the Nasdaq index climbing 14 points to close at 2,341. And the broader S&P 500 closed 3 points higher at 1,352.

In Asia, the Japanese Nikkei had fallen 38 points to 12,706 today. And in Hong Kong, the Hang Seng was 152 points higher, at 22,617.

FSA admits Northern Rock failings

Crude oil futures had risen to $101.77 this morning. In London, Brent spot had climbed to $100.97.

Spot gold had climbed to $936.70 this morning, continuing its ascent from last week’s one-month low of $904.00. Silver, meanwhile, had risen to $17.82.

In the currency markets, the pound was steady at 2.0084 against the dollar and 1.2787 against the euro. And the dollar was at 0.6365 against the euro and 99.81 against the Japanese yen.

And in Londonthis morning, the Financial Services Authority (FSA) acknowledged its failure to properly supervise Northern Rock in a report released today. The FSA admitted that its supervision of the bank had not been carried out to a ‘standard that is acceptable’ and pledged to improve. The report’s publication follows the departure of the FSA’s head of retail markets Clive Briault last week.

Our recommended articles for today…

Why you should ignore gold price fluctuations
– The price of crude oil in terms of gold hardly changed last week, but in terms of dollars both commodities fluctuated wildly. For more from James Turk on why you should stick with the metal rather than volatile paper money, read: Why you should ignore gold price fluctuations

Would a short-selling ban prevent another HBOS-style panic?
– A letter to The Times last week suggested that the best way to avoid another rumour-fuelled run on a bank such as HBOS is to ban short-selling. Tom Bulford runs through the arguments for and against this practice, here: Would a short-selling ban prevent another HBOS-style panic?