Too early to remove the tin hats
“This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
Bank of England governor Mervyn King could have borrowed those words from Winston Churchill – delivered at the Mansion House, just opposite the Bank, in 1942 – for his latest stability report. He did not exactly sound the all-clear on the credit crunch but he has suggested the worst is over.
The crunch started on 9 August 2007, but while its origin can be dated precisely, it is unlikely the end will be so easily identified. The end of the 1992 recession can be timed to Black Wednesday, 16 September, but we are unlikely to have so exact a conclusion to this crisis. Different sectors will emerge from the crunch at different times.
King may be right in saying risk is now overpriced but it will take more than his optimistic comments to move the markets. Markets always overshoot, going too high in booms and too low in slumps. After the past years’ underpricing of risk it is natural that too much weight is now being applied to it, but it will not end overnight.
And just as asset prices, particularly property, were overpriced in the boom it will take a period of underpricing before the curve turns upwards again - and that period has a long way to run yet.
King’s comments – perhaps like Churchill’s – seem designed to boost confidence when there are few other reasons for it rising. It takes more than that though, and King’s financial analysis, perhaps mathematically correct in its risk assessment, is in danger of being overtaken by downturn in the wider economy before the upturn in the financial sector happens.
Even if the banks can write-back some of their financial losses they will be forced to make provisions as businesses outside the City fail. King’s pep talk is insufficient to stop the economy going through a prolonged slowdown. He should remember that the war raged for another three years after Churchill’s speech – and that the austerity lasted another decade.
