The roller-coaster of the global financial markets reached the bottom of another loop yesterday and slowly began to track upwards again. Traders clearly reckoned a 777-point slide in the Dow Jones index was enough to frighten a dozen or so reluctant US congressmen into supporting their government's next "restructuring" proposal. However, regardless of whether a rescue package squeezes through Congress, a financial storm is on its way. So far only the trees are shaking because the damage has been largely restricted to the financial markets and conducted in a language few ordinary citizens understand. But, regardless of the gyrations of the markets, as the deepening depression hits the real economy, nobody can afford to feel safe. The banks' continuing reluctance to lend to each other is already having a knock-on effect on unemployment and repossessions. Everyone with savings, investments, borrowings or a pension will pay part of the price for the hundreds of billions of dollars pumped into the economy by central banks.
Under these circumstances, the government's best hope lies in a damage-limitation exercise. "We will take whatever action is necessary," said the Prime Minister yesterday. Belatedly, the Tories, too, finally caught the national mood of anxiety and promised to work with the government to tackle the crisis.
The Conservatives, attempting to portray themselves as a government in waiting at their Birmingham conference, are presenting a mass of contradictions. Having attempted to blame the crisis on Gordon Brown, they have switched to attempting to stand shoulder to shoulder with him now that the global nature of the crisis is undeniable. As the party that began the process of deregulation, it has attempted to defend the operation of unfettered markets but now feels obliged to criticise the excesses and perverse incentives it has generated. And, having consistently criticised big state, top-down government intervention, it is now reduced to meekly supporting huge state intervention.
Mr Cameron's about-turn on these issues is nevertheless welcome, as is his commitment to speed the Banking Bill through the Commons next week. Indeed, it was essential after witnessing the impact on the markets of the squabbling that scuppered the US rescue plan. Also, though not one UK depositer has yet lost money, Mr Cameron is right to suggest that £35,000 is too low a ceiling for the government's protection of savers' deposits. The movement of savings into gold, premium bonds, National Savings accounts and banks such as HSBC, which are perceived as safe, is a measure of crumbling consumer confidence. The limit in the US is $100,000. Before panic starts generating the sort of run on banks witnessed at branches of Northern Rock last year, the authorities should act to raise the limit.
In the longer term, it must go beyond the scope of the Banking Bill and look at the way bonuses are paid in the financial services industry, even though this is unlikely to win Tory support. Bonuses paid in shares redeemable over a period of years would encourage executives to take a longer-term view, for example.
Also, the current tripartite system of regulation, with responsibilities split between the Treasury, the Bank of England and the Financial Services Authorities, has been found wanting. The government's interim report should read: much done, much left to do.
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