Outlook Desperate times require desperate measures: and it is difficult to see the US Federal Reserve's extraordinary $400bn "Operation Twist" as anything else (not least, because there are very serious doubts about its effectiveness). What they also require, however, is a consensus for action – the sort of global response mustered by Gordon Brown following the collapse of Lehman, in which parties who have implacable ideological differences put them aside in the face of a crisis. And unfortunately, what we have now is the opposite of that.
Is that because the moment of crisis is not yet upon us? Possibly. Yesterday's stock market gyrations, eye-catching though they were, certainly do not represent a useful judgement that we have reached the day of reckoning, for equity investors are prone to extreme (and often ill-informed) reactions. As far as the impending financial crisis goes, the spikes in markets such as credit default swaps, the downgrades of leading American bank credit ratings and the difficult many European banks are having funding day-to-day liquidity needs are all flashing red signals – but we are not yet back to the weekend of the Lehmancollapse, in which it looked for a moment as if the world's financial system would not open for business on the Monday morning. On the economy, too, we are in the danger zone, as the IMF and the World Bank have warned this week, but recession is not inevitable – the global economy is still growing, so too are leading Western nations, albeit almost imperceptibly slowly now.
We have, in other words, a brief window of opportunity during which time it might be possible to mount a fight back. The problem is that if there is time still for action to be taken, there is time for arguments to rage. Christine Lagarde's plea for political unity yesterday looks doomed to failure.
So, for example, the Fed was split on whether to take action on Wednesday, just as Congress was split before it on the debt ceiling (with much more disastrous consequences, namely the US debt downgrade). In the UK, the Bank of England's MPC remains split over quantitative easing (and there are signs now too of fissures in the Coalition over the Chancellor's rigidity on Plan A). Internationally, the eurozone can't agree on how to respond to its sovereign debt woes.
People always disagree, of course, but that the splits show no sign of closing suggests consensus is some way off. The result is the sort of half-measures we continue to see presented as solutions to financial instability and economic despondency.
One can see that in the eurozone where Germany's domestic politics have forced the bloc to stop short of the sort of policy response required to draw a line – the issue of "eurobonds", for example. One can see it in the US too, where the Fed did not unveil a third wave of quantitative easing partly because it feared political hostility. Its attempt to lower long-term interest rates via Twist seems of limited usefulness given the lack of demand for credit just now in the US from either the household or business sector.
Will we get that elusive consensus in the end? There is much work to be done – yesterday we had the irony of a letter from six members of the G20 to the French presidency bemoaning the lack of political coherency that the other 14 members, including Germany, could not be persuaded to sign.
In the meantime, the room for manoeuvre narrows. The global co-ordinated response to the financial crisis of three years ago was impressive, but hugely painful too. We do not want to end up in a similar place once more.Reuse content