Gordon Brown’s oft-repeated claim to have abolished “boom and bust” – Tory or otherwise – is among his most widely ridiculed moments. Even his badly-timed gold sales (1999 to 2002, the bottom of the market, lest we forget) don’t get as much airing as this soundbite. And rightly so. The idea that you can abolish the business cycle is hubristic to the point of being delusional.
The trouble is, it’s not just Brown who fell for this nonsense. The people in charge of the financial system – not to mention plenty of the investors who follow them – still seem to believe it. Somewhere, if they only search hard enough, there’s a magic wand that central bankers or governments can wave that will make everything go away and take us back to the golden age before the Northern Rock run and the collapse of Lehman Brothers.
Just look at how markets reacted when the Federal Reserve was getting ready to release its latest statement on Tuesday night. I was keeping an eye on Twitter (it’s very good for breaking news, although it’s worth taking most things with a pinch of salt until you’ve confirmed them elsewhere – you can follow me at www.twitter.com/johnstepekMW). Everyone was clearly hoping that Ben Bernanke and his colleagues could somehow come up with a plan that would prevent a US recession, delay an implosion in the eurozone – or perhaps simply prop up stock prices with a load more printed money.
Then came the statement. Markets in everything from foreign exchange to stocks swung wildly as investors across the globe grappled to digest the news that the Fed was effectively promising to keep interest rates near 0% for two years. The day ended with a huge rally (even though a long-term 0% rate sounds horribly Japanese to us). Then the next day, everything promptly fell right back as investors started panicking over the crisis in Europe again.
It’s almost comic. But it’s also profoundly damaging. How can anyone expect the average investor to have faith in the workings of the markets when a nod from the Fed can cause this kind of volatility? And bear in mind, stockmarkets really hadn’t fallen that far. Yes, it was a sharp correction. But after the two-year rally that we’ve had, you’ve got to expect a few ups and downs.
We’re at the stage where Wall Street seems to think the Fed is obliged to ensure that stockmarket investors never have to bear any losses. They’re going to get a nasty shock. The fact is, we had a boom. We’re now living through the bust. We could make the process of healing a lot more rapid if we didn’t try to prevent every single dip and shudder in the markets along the way. But one way or the other, the Great Correction, as Bill Bonner calls it, will play out until it’s done.