Financial problems not what they seem

The following comment by me appeared in the latest Fund Strategy (23 March).

What has the chairman of America’s Federal Reserve got in common with the hosts of “fake news” television comedy programmes? More than supposed.

Certainly they were all high profile figures over the past few days. Ben Bernanke announced a massive quantitative easing package while Jon Stewart and Stephen Colbert made news with their comic roasting of the financial media.

But there is more to it. They all express a contemporary obsession with finance. This was also apparent in the frenzied American media discussion of the bonuses given to employees of AIG, the country’s failed insurance giant.

No doubt the media folk responsible for reporting such stories would say finance is big news in the current market environment. What they fail to recognise is that it is merely an expression of more fundamental economic problems.

Bernanke’s massive quantitative easing package is also based on the assumption that the key problem facing the economy is insufficient liquidity. If money is pumped into the economy it should, it is assumed, bolster confidence and rejuvenate consumption.

For some reason bankers, comedians and journalists are all unable to make a key distinction between the way things appear and the way they are. They can see financial turmoil, as it is in front of their eyes, but they seem blind to its underlying driving forces.

The huge growth in the financial markets since the 1970s should be seen, at least partly, as a outgrowth of economic atrophy. As the world economy slowed following the end of the post second world war boom, it was often more lucrative to play the markets than invest productively. As a result, surplus capital found itself channelled into a ballooning financial sector.

The climate of risk aversion which has emerged since the 1980s helped give shape to these rising markets. Financial institutions often became more concerned with transferring risk than their traditional role of raising capital. These factors have provided the backdrop to the recent turmoil in the financial markets. In general terms the markets reached a level which proved unsustainable.

This analysis also suggests that quantitative easing is unlikely to rejuvenate weak economies. It can only provide a temporary boost as the credit crunch is itself an expression of an underlying problem.