We should be relieved if it's only a repeat of 1987

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The Independent Online
Few people can have failed to realise that this weekend is the tenth anniversary of the stock market crash of 1987. The newspapers and brokers' circulars have been full of it. All of them have pointed to the uncanny similarities between then and now. The rise in the Dow Jones Industrial Average over the last four years superimposes almost exactly on the chart running up to the 1987 crash. Economic conditions, both in the US and Britain, are also very similar. Buoyant, low inflation, conditions reigned supreme.

And exactly the same sort of things were being said about why the world economy had changed fundamentally in a way that meant the massive economic corrections of the past would never be repeated. We have entered a "new paradigm", to use the jargon of the US, which has all but abolished the business cycle, improved productivity levels beyond anything believed possible before, and changed asset valuations for ever.

Despite these parallels, few people believe we are heading for anything like another 1987. One of the more fashionable theories at the moment suggests that at worst equity values will plateau for a while before moving upwards again. I've been wrong about Wall Street for so long now that I am scarcely best qualified to comment on these matters, but I believe this optimistic view of stock valuations is dangerously complacent, that what we have seen on Wall Street is the build up of a speculative bubble comparable in scope to the one that consumed the Japanese stock market in the early 1990s.

When it bursts, as eventually it must, the fall out is going to be equally catastrophic, perhaps worse given the size and importance of the US economy. If we are about to see a mere repeat show of 1987, then we should all feel mighty relieved about it. 1987 was not a proper crash at all. In the scale of things, it was but a minor hiccup in a 20-year bull market. What comes next is going to be a lot more serious than that.

The number of pointers to the extremes of Wall Street's position have become too numerous to list. Here's one I came across which seems particularly vivid and striking. The average American would have to work nearly four times as long today to buy a single share in the Standard and Poors as he would have had to in the early 1980s. Using the same yardstick, he would have to work twice as long today as at the top of the last great bull market of the 1960s.

It seems highly probable that the boom on Wall Street has begun to contribute to economic growth in the US - that it is the stock market that has begun to drive the American economy rather than the other way round. Money can be raised for next to nothing, forecast rates of return have reached fairy-tale proportions, an investment boom of quite staggering proportions has built up, both within the stock market and in new business ventures. That the stampede will eventually reverse is not in question. Nor is its effect when it does - an investment freeze and recession exacerbated by a stock market crash. The only question is when. At this stage, the simmering trade row with Japan doesn't look serious enough to trigger it, but you never know.

How it is that Richard Branson ever finds the time to go hot air ballooning is anyone's guess. Even by his own hyperactive standards, this has been quite a year for the billionaire entrepreneur. In the last fortnight alone he's launched two new business ventures, been lambasted over poor standards of service at Virgin Trains, and hired Chris Evans to Virgin Radio. His latest escapade is One, billed with characteristic hyperbole as "a revolutionary banking account set to turn personal banking on its head".

On queue, Mr Branson was available for photo call yesterday resplendent in bowler hat, rolled umbrella and Virgin-style red pinstripe. Doesn't this man know when to stop? And should we be trusting someone with a finger in so many pies to handle our money?

Taking the two questions in turn, Mr Branson's achievement and brilliance as an entrepreneur has been to establish the Virgin name as a powerful brand that can be used over a wide and diverse range of consumer products. Mr Branson personifies what the brand stands for - youth, daring, the faintly anarchistic, fun, anti-establishment, and the independent.

Not for Mr Branson the modern day corporate mantra of "focus" and sticking to a particular business. He comes at it from the other direction, using his brand to poach business from the soft under belly of a whole range of established and complacent oligopolies. The dizzying collection of unrelated businesses that now make up the Virgin empire would make your average fund manager, if this were a publicly quoted company, quite ill with anxiety. Had the City had any say in the matter, it would have stopped Mr Branson ages ago.

Mr Branson's latest foray - into the world of direct banking - is typical of his technique. Virgin is hardly the first to spot the business opportunity that lies in the fat margins and general complacency of the established banking market. The supermarket groups and a number of other species of low cost banking were ahead of him. But in introducing one stop banking which lumps together your mortgage, savings, current account and other loans, he and his partner, Royal Bank of Scotland, have come up with a simple, clever and genuinely new marketing idea with widespread appeal.

It won't suit everyone, and to be honest, those with the time and sophistication to do these things would undoubtedly be better off financially by continuing to customise their own personal finance needs. Indeed this new banking service only really pays for those whose saving deposits come close to the size of their mortgage and other loans. Such people ought in any case to be asking themselves why they are in this position.

What is more, though the scheme has plenty to commend it in terms of convenience, there are obvious dangers. For the ill disciplined, there is every incentive to spend all the equity value of your property. There appears to be nothing that would compel the account holder to save in a manner which would allow him to pay off his loan on retirement.

What I'm struggling to say here is that this is an idea with such obvious and widespread appeal that it is quite astonishing no one has ever tried it before. On the other hand it doesn't offer significant cost advantages over traditional, more piecemeal methods of banking and there are clear dangers with the whole thing. Classic Branson. People will flock to this product if for no other reason that it carries the Virgin name. Because a parsimonious Scottish bank lies behind the whole thing, nobody needs to be too concerned about Mr Branson's credit worthiness either. But is this really such a revolution in personal banking? I think not.