CRUNCH OR CRASH?
By Floyd Toulet. An example of recently commissioned print work
As the global financial system wrestled with an increasingly bleak set of indicators last Monday, news of Lehman Brothers’ imminent collapse set more than tongues wagging. If one of the world’s largest investment banks could collapse so dramatically, the argument went, then what next? Of course in a period as unsettled and twitchy as the past few months talk of global meltdowns and crashes have quickly become the norm, but there is perhaps more to reflect upon this time. Particularly since leading economic expert Alan Greenspan publicly joined the fray suggesting that we should: “recognise that this is a once in a half a century, probably once in a century type of event.” Coming from the former chairman of the US Federal Reserve it’s a warning that many of the good and the great will take very seriously.
Whether the Lehman’s disaster was avoidable or not is something commentators will be hotly debating for years, what everyone agrees is that their decision to file for Chapter 11 bankruptcy protection to "protect its assets and maximise value" has shot off a clear warning to economies and financial institutions around the world, prompting further speculation on the nature and scale of the UK’s current credit crunch – beginning with the 5,000 Lehman jobs in the City and High Wycombe. How secure can they be now and what will the consequences of such a blow be to the UK’s already precarious hold on the recession?
Lehman is unquestionably the biggest victim so far of the credit crunch, but the unspoken fear is that they could also just be the first of a series of major players to succumb to the global financial market’s growing hysteria and uncertainty. And with the FTSE responding with a staggering 400 points drop on Monday morning and predictions that the Dow Jones industrial average will slide by as much as 4%, even the most optimistic commentators are struggling to find something positive to focus on.
In the UK where the talk has been of battering down the hatches and facing up to the long haul, a handful of exceptions such as the travel industry have appeared to be completely impervious to the international drama unfolding all around them (in the three months leading up to June TUI Travel recorded operating profits of £65.4 million). What affect a collapse like Lehman’s will have remains to be seen, but the fact that there will be consequences can no longer be disputed.
The word on the Street is that we are set for a tough year. Many claim, with growing authority, that where there is a boom there will always also be a bust. The argument goes that in a period of rapid growth, bad ideas that would ordinarily never be are tolerated are indulged and allowed to develop; often propped up by misguided investors spurred on by the prospect of ever quicker and bigger returns. More and more flawed businesses are sustained and kept afloat by the markets buoyancy alone so that when confidence inevitably begins to fall away, the weaker businesses are exposed and crushed in a process the celebrated Austrian economist Joseph Schumpeter called creative destruction. Needless to say this vision of the free market in action is somewhat sullied by the fact that significant numbers of ‘sound’ and ‘sensible’ businesses also find themselves up against the wall for no reason other than bad luck.
The $100 billion question is what can be done to separate the wheat from the chaff and avoid future injustices? The answer of course is absolutely nothing.
The free market is in free fall.