Greenspan's cut smacks of panic

SO IS the crisis in financial markets now over? Has Alan Greenspan, by unexpectedly cutting US interest rates a further quarter point, done the trick and stopped the rot? Don't count on it.

The Federal Reserve chairman's action is what the markets wanted and thought vitally necessary. The trouble is that by doing it so soon after the last cut, by calling an emergency meeting to push it through, and by citing "growing caution by lenders and unsettled conditions in financial markets more generally", Mr Greenspan appears to be showing unnerving signs of panic.

There was something reassuring about the complacently cautious approach being adopted until this week. It was as if Mr Greenspan might know something the rest of us didn't, that by ignoring the siren calls for urgent action, he was signalling that basically everything was alright. There was no need to do anything, he seemed to say, other than sit back and wait for the crisis to blow over.

If he ever thought that, he plainly doesn't any longer, and in thinking Mr Greenspan might know what the rest of us don't, the assumption must now be rather that there is something extremely unpleasant hidden beneath the carpet. For weeks there have been persistent rumours of a financial black hole at UBS and others over and above the provisions already made, of huge open positions which banks dare not close for fear of the scale of loss thereby crystallised.

Certainly the scope of the credit crunch now sweeping world markets would indicate something rather worse than the comparatively limited provisioning we have seen thus far. Nor does the banking system's growing aversion to risk seem wholly justified by the size of the corrections experienced to date in Western markets.

One of the excesses which has come to light in the crash of 98 is that massive debt leverage was being applied by hedge funds and others to trading strategies within financial markets. The effect of the leverage was to multiply the loss of capital when these positions went wrong. We know that this is what happened to Long Term Capital Management and some other hedge funds, but the phenomenon may be much more widespread.

For Mr Greenspan to cut rates in this way must mean he has come to accept that there is indeed a real risk of financial meltdown, of the contagion that started in the Far East plunging the western world into recession or even slump.

It is still too early to say with certainty whether crisis has been averted. But at least Mr Greenspan seems finally to be taking it seriously, even if our own European central bankers have yet to lift their game. That in itself is an optimistic sign.

However, in the end there is no way of avoiding the pain of a boom to bust cycle. By taking action at the time of the 1987 crash, the Fed and others may have delayed the downturn and ensured that it wasn't as severe as it might have been. But it didn't contain the blowoff altogether. The same may be true this time round. There appears to be no gentle way of deflating a speculative bubble.

For investors the message is that while share prices may be stabilising, they are unlikely to return to the heady growth of bye gone years for some considerable length of time. If they do, if financial markets chose to ignore the terrible warning just issued and resume the merry old dance of recent years, then they will only be storing up for themselves worse to come.

That doesn't mean there isn't value to be had in these markets. For those willing to take a long term view, there is, some of it spectacularly good. But the emphasis must from here on in be very much on stock selection.

EVERYONE LOVES a David and Goliath story. This week we had one that fair warmed the cockles of the heart. Bill Gates, it emerged, thinks the greatest threat to Microsoft's continued dominance of the personal computer market comes not from Cisco, IBM, Sun Micro Systems, Apple or any of the other American computer giants, still less from Joel Klein and the US Justice Department, but from plucky little Psion, Britain's very own maker of palm held computers.

As is his manner, Psion's founder and chairman, David Potter, is proving distinctly shy about this revelation, which came to light after an internal Microsoft memo was leaked to the American press. The former academic doesn't want to discuss it at all. So does Mr Gates have good reason to feel worried? Psion has a market capitalisation of rather less than 0.2 per cent of Microsoft's pounds 136bn. If Mr Gates truly believes Psion to be such a menace, why doesn't he buy it, or merely crush it under foot, like a tiny insect? That's what he's done to a veritable legion of his US competitors, after all.

We can only guess at the answer, but perhaps the point is better put the other way round. If Mr Gates thinks Psion a threat, then Mr Potter is going to have to display extreme agility to avoid that same fate.

Thus far he's proved himself remarkably fleet of foot. Psion's first electronic organiser was followed rapidly by a host of Japanese and American copycat versions, many of them, it has to be said, superior to Psion, and for a while it looked as though Psion would go the same way as so many great British inventions.

But perhaps surprisingly, Psion rose to the challenge. Its first palm held computer, with its own tailor made operating system, was by far the best of the bunch. This served as a wake up call to Mr Gates. Palm held computers were a tiny part of the total computer market, but it was growing fast and could potentially prove a serious long term threat to Microsoft's PC operating system.

Microsoft responded in time honoured fashion, by railroading Psion's competitors in palm held computers into using a Microsoft operating system, Windows CE. Again it looked as though the game was up. Psion would become like Apple, everyone thought, condemned to a technical cul de sac.

But again Psion is defying the sceptics. Just recently it signed up with the world's three largest mobile phone manufacturers, Motorola, Ericsson and Nokia, to develop a new range of products which combine computing with mobile telephony. If you believe, as most experts do, that the retail market for computing is going to move away from the desk top and into the mobile phone, then this is a quite sensational coup. It still looks a bit fanciful to regard Psion as the next Microsoft. But as Mr Gates has correctly surmised, it's got a better chance than most.