Any intervention makes sense at the time. After all it is human nature to try and prevent an undesirable event taking place. Animal preservation for example, and don’t get me wrong, I am a conservationist by nature (no pun intended) but can you actually stop a species becoming extinct once the total numbers get to such a low level? Are we not just slowing down the process to an event that is inevitable?
I believe the same occurs in the financial markets, but with the ‘double whammy’ that intervention may actually increase the severity of the event when it finally occurs.
Let’s start by looking at the Banking Crisis of 2008. We let Lehman’s go but saved AIG, Lloyds and RBS, for example, along with many others, with an aggressive round of quantitative easing by central government. Printing money and dishing it out, for all intent and purposes. But are we not just avoiding the inevitable i.e. severe economic depression as the result of too much debt being allowed to accumulate, not just for corporations, but also individuals? Oh, and with a possible side effect of hyper inflation. I remember the papers talking 10 years ago about the excessive levels of personal debt; and 110% mortgages should have been the real alarm call!
Now in Europe we have individuals, corporations and countries in trouble and we are attempting to bail them out, but with what money? Is it just passing debt around from one country to the next? Sub Prime springs to mind…
In 1992, the Bank of England attempted to support its currency by continuous buying in the vain hope that it would be sufficient to keep sterling within the boundaries of the European Exchange Mechanism. It did not work, resulting in the withdrawal from the mechanism, releasing interest rates to freely float to ultimately where they should be.
So where am I going with this?
Well, Europe is in trouble as a result of several of its member nations struggling with sovereign debt. And we are trying to save them by loaning them more money; loans which got them into this state in the first place. Everyone knows, if you drive across Europe passing from one country to another, you see immediate differences. Language being the first, then culture, values and varying levels of economic prosperity. However, the European Union has attempted to converge these differences by setting the same rules and boundaries for all of them; not forgetting giving them all the same currency? In my eyes this was never going to work; it was just a matter of time before it all went wrong, because the member countries were all at different levels of development, created by differing histories and ethics. It only lasted as long as it has done because we have been in a phase of global economic boom, since the European Union was created almost 15 years ago.
More recent interventions….yesterday the National Bank of Switzerland was rumoured to by selling its own currency to provide support to the Euro. The German Chancellor announces restrictions on ‘short selling’ of some of its own listed companies… I wonder what would happen if we just left the economies to sort themselves out, Darwinian style.
So looking at the markets, and we are all traders at heart, intervention rarely works in the end and often just makes the bubble bigger before it finally bursts. This means that a breakup of the European Union is more likely than many believe, a double dip, with the second one much bigger than the first more likely than many believe and countries defaulting on their debt and freely floating their economies to where they should be, more likely than many believe. Actually, in the long run this may not be so bad at all and the Euro may well come under renewed pressure, which is great for exports, but only if Europe actually survives.
Lots of questions, I know, but hopefully some food for thought.
