Julian Knight: Will politicians be able to avert credit crunch part two?
The world's governments that bailed us out in part one now need bailing out themselves
Sunday 07 August 2011
Welcome to credit crunch part deux, well, maybe. Global markets are in freefall, Italy is a mess, the Germans are taking their time, and the US is divided between a president who, by the day, is turning into a sub-Jimmy Carter and complete headcases on the Republican side. Meanwhile, in the UK, our leadership is sunning itself on holiday. The world governments, the heroes of part one, thanks in part to Gordon, the dashing lead, are now the victims of part two. In part one the governments bailed out the banks, but who can bail out the governments in part two?
The answer is only that the strong must help the weak, and ridiculous political constructs such as the 17-member eurozone need to be radically overhauled. If this is the start of another Lehman-style crunch then the political plates are going to have to move incredibly swiftly, and I'm not sure the political class in Europe and the US is up to that. In effect, the current turmoil on the markets reflects their collective lack of faith in the people at the top of governments and institutions around the globe. In the same way that if a chief executive is seen as not up to the job then the share price in his or her firm will shatter.
However, in all this doom and gloom I can't help but look at the firms trading at very low levels of price to earnings, with major stocks of cash, and slimmed down after the recession – and think that here is a buying opportunity writ large. But only if the politicians and regulators show themselves up to the tasks at hand over the coming days and weeks. If they aren't, then those same company balance sheets will be laid waste by a collapse in confidence in the wider economy. Again, as in part one of the credit crunch, this is going to be a very close-run thing.
Let's have action, not words
If I see one more report telling us that we are heading for an impoverished old age I think I'm going to scream, or do something equally manic – like buy Italian government debt. Last week we had the National Association of Pension Funds report led by the former head of the Treasury Select Committee, Lord Mcfall, and the Department for Work and Pensions' latest figures on longevity, both of which told us ... yes, you guessed it. I really have had enough of every man and his dog telling me that we are in a collective mess, and I would far rather move on to the action phase.
The Government's plans for a higher, flat-rate, citizen's pension, twinned with the scrapping of means-tested benefits, is a sensible first step. The state pension is the base from which employers, pension providers and individuals have to build; get it right and the rest has a chance. But, increasingly, it seems there are concerns about the affordability of a citizen's pension in the Treasury, and, at a time of austerity, can we really be seen to be, in effect, boosting most people's basic state pension?
Of course it's the Treasury's job to question the need to spend, but I'd say this is clearly a case where we can't afford not to. If there was any worth to the reports of last week it is that really we have to act now – and decisively – over this issue.
New dawn for sunset industry
A "sunset industry" is a phrase coined by City types to describe an industry which is being expunged slowly by the march of technology and changes in wider society. In the 1950s you'd say Lancashire cotton was a sunset industry, in the 1980s coal would have matched the profile. Now, sunset industries, according to one fund manager I met last week, include terrestrial television and newspapers (we can't be that much of a sunset industry, though, as he still paid for lunch).
But another sunset industry – rather appropriately – is package travel firms. The collapse last week of Brighton-based Holidays 4 UK – at the height of the holiday season when cash should be flowing in by the bucket-and-spade load – highlights the acute decline of this industry. And meanwhile, Thomas Cook's chief resigned amid a collapse in profits.
Fortunately, Holidays 4 UK is Atol protected, which means holidaymakers will be flown home. But in previous collapses Atol protection has not been enough, because of a little-known loophole. Basically, people who have booked with a package company through a travel agent have found that because their agent has bought flight and hotel from different sources, rather than just one Atol-protected firm, they don't have the level of protection they hoped for. Last year, during the collapse of Goldtrail, for instance, many customers were shocked to find that their flight had fallen through but their hotel was paid for, or vice versa.
The Government would like to see Atol protection extended to these type of arrangements but we are still waiting for action. And the fact that the package-travel industry is a sunset industry makes this imperative.
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