Notes on a crisis

Imagine the financial crisis as an illness. Now we are at the stage of the raging fever, it seems as if the patient will die, but the wise doctor knows this is a phase that has to be passed, makes sure the sick man has enough water and waits for the crisis to subside.

The decision of the FSA to ban short selling of financial stocks is understandable but, in my view, wrong. Short selling, which the FSA admits is ‘a legitimate investment technique in normal market conditions’ is a pointer to how things are likely to be. Many financial institutions are insolvent and to forbid this indicator would be the equivalent of denying the patient had a disease. You don’t help yourself by banning the symptoms.

Besides which there are the people who already own the shares. You are not going to stop them selling, presumably, which they might now be more likely to do given that the market is artificial – protected by the FSA.

The statements by Alasdair Darling and Gordon Brown abut the HBOS/Lloyds merger maintaining a presence in Edinburgh were disgraceful, particularly if true (it might of course be a bare faced lie – you never know with these folk). There is a by-election coming up in Fife and manipulating the rescue of the financial system for your own electoral purposes is about as low as politics gets.

Equally awful is the statement that the new company should maintain its mortgage book. Lloyds HBOS should concentrate on surviving and if that means lending less it means lending less. A casual scan suggests it is overexposed to the UK lending market. The markets will remember that this government cannot even keep its own house in order and is scarcely equipped to be advising others.

That aside, the encouraging of mergers is a good thing (and far better than bailing out financial institutions or nationalising them) and the co-ordinated liquidity pumping by the central banks (making sure the patient has enough water) seems to have gone well.

We now have to wait for the fever to subside. There will be more mini-crises throughout 2009, in my view, but this might be, as Churchill said of the Battle of Britain, the end of the beginning.