Recession fears spark another big sell-off

Another massive fall in world share prices shows that these big state bail-outs will be no panacea...

by
Last Updated: 31 Aug 2010

It’s been yet another horrible 24 hours for the world’s stock markets. The FTSE tumbled by over 200 points this morning after the US Dow Jones index fell by 8% yesterday, its biggest one-day drop for more than 20 years. Asian markets also took a hammering, with the Japanese Nikkei (down a whopping 11.4%) and Hong Kong’s Hang Seng (down 7.6%) the biggest losers. After the heady euphoria of earlier in the week, as the announcement of huge state rescue packages sent markets soaring, we’ve been brought back down to earth with a bump…

It’s increasingly clear that the trillions of government dollars poured into the financial sector in recent weeks will only get us so far. Although investors may have been reassured about the long-term viability of our big banks, they’ve clearly just turned their attention to other unpleasant problems instead: in particular, the apparent inevitability of a very nasty global recession in what boffins like to call ‘the real economy’ (i.e. outside the gleaming towers of the City). On both sides of the Atlantic, retail sales were significantly down last month, while only yesterday the UK was rocked by a bigger-than-expected rise in the unemployment figure.

To make matters worse, all this concerted government action hasn’t even succeeded in one of its key aims: getting the banks lending again. Although LIBOR (the inter-bank lending rate) has edged down slightly, it’s still running way ahead of interest rates – which means banks are still hoarding their money, Scrooge McDuck-style. And this makes it incredibly difficult for central bankers to influence events through interest rates – if banks are basically unwilling to lend, lopping another 25bps off the base rate isn’t going to make much difference.

Fixing this problem needs to be the number one priority for the Treasury, because it’s key to a UK business recovery – without the circulation of capital, companies can’t raise money for investment, while revenues will fall as consumers rein back spending. But since pouring extra cash into the system and hoping for the best doesn’t seem to be  working (at least not yet), it’s becoming a bit hard to see what else politicians can do. Their only other options would be to take control of lending directly (by twisting the banks’ arms or doing it themselves), or to try and stimulate the economy by boosting public spending (as Robert Peston suggests today). Both are fraught with difficulties.

The G8 leaders have apparently agreed to Gordon Brown’s calls for a global economic summit. But we’re not holding our breath for a miraculous solution to our current woes...


In today's bulletin:

Recession fears spark another big sell-off
Audit office assets frozen in Iceland
The Queen hits Google HQ
Tricky times for techies?
MT's Little Ray of Sunshine: Spare room spur

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