Leading Article: Time to stop hedging bets

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The Independent Online
IT HAS been a very bad week for financial markets - even by the appalling standard of recent weeks. Not long ago it was possible to think of the downturn of the London stock market as a healthy correction. Today there is no comfort in the thought that the plunge from 6179 at the FTSE's peak in July to 4750 on Friday is shallow by historic bear market standards; the comparison merely tells us that there is a long way still to fall. Nor is there comfort in the thought that a spate of job losses has come at the end of a long period of falling jobless totals: these are good jobs in manufacturing that are suddenly being destroyed, often in high- technology industries on which much hope for future growth and prosperity had been pinned.

Desperate times demand at the very least strong measures, but there is little reassurance to be drawn from the gathering of finance ministers and bankers at the IMF/World Bank meeting in Washington to discuss "a new global financial architecture". Time is too short, governments and central banks are too unwilling to act in a co-ordinated way (over interest rates, for example), and leadership is too weak for any radical structure to be forced swiftly into place to halt the current slide.

And the picture has darkened still further with the change of focus from the failures of emerging markets to the excesses of speculative hedge funds. When Thailand, Indonesia and Russia went down, there was at least the hope that financial crisis might lead to greater democratic accountability - and at least the excuse that fragile national institutions were unable to withstand the buffeting of world markets. But when Long-Term Capital Management of Greenwich, Connecticut, went down last week, threatening a massive crisis of the international banking system, there were no excuses to be had. These were some of the world's most sophisticated financiers and they had used $4bn (pounds 2.4bn) of capital to create $200bn of risk, taking in some of the cleverest people on Wall Street and some of world's most sober institutions, such as the Union Bank of Switzerland. And no one knows how many other hedge funds are in similar straits.

But is there nothing to be done, except to keep talking hot air and bailing out losers until funds are exhausted and the world economy is throttled by a credit crunch of proportions that have not seen since 1930? Tony Blair has taken in recent weeks to echoing Margaret Thatcher's view that the markets cannot be bucked - meaning that he hopes we won't blame him if global markets cause job losses in semi-conductor factories close to his constituency. But markets can certainly be jolted by well-staged displays of national and international resolution, and that is what is needed now. Without such a jolt, a slump is an increasing possibility. Cuts in interest rates, led by the US Federal Reserve's token quarter-point cut last Tuesday, will shave the odds against a worldwide recession, and it will be extraordinary if the Bank of England does not follow suit this week. But to keep at bay the more profound risk of depression, action is needed to maintain confidence and liquidity in the international banking system. That may sound like a call for grander "global architecture", but in practical terms it means a spot of quick DIY at national level first. It has been said for months that the key event which would signal a bottoming-out of the Asian crisis would be an authoritative move by the Japanese government to restore faith in its domestic banking system. Around the world, steps are needed to prevent other banking systems sinking into similar states of paralysis.

And it has to begin at home. Global regulation of hedge fund activities, for example, is a virtual impossibility: hedge fund traders may live in Connecticut, but their transactions are booked in offshore havens whose governments have no desire to lose the hedge funds' business by imposing "global" rules on them. No system exists to create an aggregated picture of hedge fund dealings around the world. But the big banks who have lent so wildly to LTCM and others all come under national systems of banking supervision and in most cases enjoy implied central bank guarantees for their depositors' funds: a British high street bank, for example, could never be allowed to fail. Those banks should be told immediately to limit new exposures to hedge funds, and to report them in detail. And central banks should willingly share the information, so that they can pinpoint trouble spots ahead.

Gordon Brown may be keen to go grandstanding in Washington with his blueprint for a global regulator, but he would be better closeted at home with the Governor of the Bank of England, making sure that the City's hatches are tightly battened down against the coming storm. We know by now that banks can rarely be trusted to act in the best interests of the economy as a whole: in the present crisis, it is up to governments to see that they stay afloat and under control.