In war and in politics, a collective can be undermined by the loss of a leader: with no one to stake out a direction and lead the way, demoralised foot soldiers fall prey to panic and disorientation.
As the last two weeks prove, financial markets are no different. Waves of funds rushing towards perceived havens reflect nothing less than the self-decapitation of economic policymakers across the developed world.
The market swings – double-digit slides in equity markets, currency flight to the yen and the Swiss franc, a seizing up of some bank funding markets, and record high yields for Spanish and Italian sovereign debt – have one thing in common: investors scrambling out of risky assets into those thought to offer safety in turbulent times. This is a self-reinforcing stampede, for nothing is scarier than being in the middle of a scared crowd.
But the panic is no case of spontaneous self-combustion. Investors have become ever more concerned about the mismatch between bad economic news and politicians’ response. In the US and across Europe, signs of a sharp growth slowdown have been accumulating. What have their elected leaders proposed? In the US, an unseemly and unnecessary squabble about the debt ceiling; in Europe, persistent quarrelling about what size of water pistol to deploy against the conflagration in sovereign credit markets.
The European Central Bank calls its approach one of “constructive ambiguity”; other central banks no doubt wish they had thought of the label first. But nothing is less constructive than ambiguity at a time of disorientation and growing nervousness. However, ambiguity – or indeed aimlessness – has been a sin committed more by elected politicians than by technocrats.
Not since early 2009 have the world’s leaders shown the kind of concerted firmness required to reassure markets that policies are being pursued to extract the global economy from crisis. If one good thing comes out of this week’s market panic, it would be to shock politicians out of the complacent parochialism in which they sought refuge before the danger was over.
Things are still not as bad as in late 2008. Breakdowns in private debt and derivative markets caused the great recession. Today, these still seem under control. While collapsing stock prices are scary, it is not the job of states to keep them high.
But the tremors in the Italian government bond market can yet become a Lehman moment. The eurozone must make itself capable of stopping a run on Italian debt: it should heed the call by European Commission president José Manuel Barroso to reassess the size of the currency union’s rescue fund, and do so fast. When markets fear the worst, politicians must summon the authority to calm them down.