July 28, 2002

Let's borrow some money

Posted in ·
Share 

Oversized wheelbarrows of salt, rather than the usual pinch, were needed when we heard the former cheerleaders of the stock market boom turn into Jeremiahs this week.

“Of course it was a bubble” they said, or “Nobody really believed it could last”, or “Only a fool would have bought Elan at $70 a share”. “Pensions are now in danger” they said, or “This is irrational, the market is in the grip of emotions, market falls are the triumph of emotion over reality”.

These are just a few of the quotes delivered by some of the most eminent financial minds in the country who were attempting to explain what had happened in stock markets. That they had seen it coming or they now believed the selling had been overdone.

Oh, the benefit of hindsight! I bet the authors of Dow 36,000 — a best-selling financial tome which filled airport bookshelves in the late 1990s — wish they had knocked a zero off the title.

This book, like many others of the time, exalted the new economy, the strength of the American way and the long-run inevitability of stock-owning as a form of building wealth.

Had a zero been lopped off the title, it might have been more accurate and might have saved millions of US and European investors the pain of losing most of their savings.

If the Irish commentators who said the boom could last forever had had a better grasp of history, or an appreciation of the forces driving the financial markets, they would be more credible today.

History tells us that such manias are repeated over and over again. Equally, those who dissent during the frenzy (as this column did) are dismissed as cranks. The herd can be wrong and thinking differently from the herd, although at times lonely, can be the right thing to do.

All bubbles — whether in stock, tulips or property — are characterised by similar attributes: rumours fuelling the boom; rapid growth of leverage through the use of futures or paper credit; conspicuous consumption by speculators; sharply-rising prices followed by a sudden collapse; and initial government passivity followed by belated action.

Recent belated action by the Bush administration on US corporate governance signals that we are close to the last leg of the cycle that began in 1994. Yet Bush’s urgings this week are precisely of the type traders do not want to hear because, when politicians whose financial experience is modest, get involved, we know that something big and nasty has occurred.

Worse still, when the American president gets involved and then confuses advice on the market with a PR exercise for the White House, we know he is out of his depth.

On Tuesday, the Bush administration got all hot under the collar over the way cable TV news networks displayed the movement of the stock markets at the bottom of the screen while Bush was speaking.

There were no complaints on Wednesday, however, when positive arrows were being shown as Bush commented on the arrest of a chief executive officer who was charged with treating his company’s treasury as a personal piggy bank. It was just like the scene in The Life of Brian with the tormented emperor and the sniggering guards.

Bush is trying to be populist. The American people, who have been burned on their stock holdings, need someone to blame. For the populist Bush, a few accountants and a couple of corrupt chief executives will fit the bill. The fact that on Tuesday he believed the people were so stupid as to see a correlation between his speech, which was written by an adviser, and the direction of the market says more about the man than the audience.

This brings us back home and on to two of the greatest crimes against economics perpetrated this week by a pair of politicians who should know better: the Ministers for Finance and Justice. Finance Minister Charlie McCreevy is getting worried about the state of the national accounts and he seems petrified of running a deficit. Deficits are normal when the economy turns down and there should be no panic.

The idea that a government should reduce public spending when faced with a downturn in activity is precisely the type of economics that has discredited the IMF worldwide and contributed to crises across the world from Asia to Argentina.

What is the US doing in response to its downturn? It is running a large deficit. What should we be doing? Precisely the same. Cutting expenditure or raising taxes is likely to reduce domestic demand further.

The panic evident in the shrill voices in the media over the past few days is even harder to understand given that they are telling us that the downturn is temporary and that Ireland is fundamentally sound.

The ESRI has indicated that it believes the economy is set to recover strongly in 2003/4. So what is the problem? If the slowdown is temporary, the government should borrow money rather than cut spending. Interest rates have never been lower and our credit standing never higher, so the cost of borrowing is historically modest.

Either McCreevy believes the downturn is permanent, or he is not making any sense. No matter which way you look at it, Irish government spending as a percentage of GDP is too low.

It is always a fine balancing act between spending too little (so your infrastructure stinks) and spending too much (so taxes have to rise and capital flows out of the country). It is irrefutable that we are closer to the former than the latter and spending should rise accordingly.

If you don’t want to raise taxes, then borrow a little. That is the beauty of EMU. We can borrow money from the European pool of savings at no incremental cost to ourselves. In addition, rumblings on the continent indicate that the stability pact (which limits government borrowing to 3 per cent of GDP) is set to unravel in the downturn anyway.

The second oddity coming from the government this week was the bizarrely entitled Operation Hyphen. The PDs, of which justice minister Michael McDowell is the leading bright spark, believe in immigration. They may be unique among Irish politicians in seeing immigration as part of a process of economic opportunity for this country made possible by the fall of the Berlin Wall.

We all know that the mass movement of people will be one of the biggest phenomena to affect western Europe over the next 20 years. We know that people are coming here to make money and forge new lives, keeping wages down in the process.

We also know that supposedly tougher immigration laws are bogus because the reason an 18-year-old gets into the back of a freight truck in Turkey is obvious to a culture that understands the expression “coffin ship”.

We need immigrants — and rounding up a few hundred illegals will not make a jot of difference, unless Irish people are prepared to work all night in filling stations. If you want petrol, Red Bull and milk 24 hours a day, you need immigrants — legal or illegal. The economic side of McDowell’s brain knows this, but the populist streak in him wants to be seen as Rambo. It doesn’t wash.

On balance, the sound of crises in partnership, public finances and government spending is the sound of the galloping herd. It does not make sense, unless the downturn is permanent, which none of the herd believes.

Likewise, rounding up illegal immigrants is anti-economic, against all our interests and, given global migration, about as useful as a finger in a dyke.

Finally, the financial “advice” given by the experts on stocks and shares this weekend will be as valuable as the Dow 36,000 was two years ago.