Financial Times Editorial Comment: World discovers it is still breathing

Financial Times Editorial Comment: World discovers it is still breathing
Copyright The Financial Times Limited 2009
Published: May 8 2009 19:25 | Last updated: May 8 2009 19:25
http://www.ft.com/cms/s/0/a30c0260-3bfa-11de-acbc-00144feabdc0.html


The end of the world has been cancelled for now, if we are to believe recent market movements. Confidence is slowly returning to investors, who have discovered they are still alive after last autumn’s near-death experience. Government policies – from unorthodox central banking to stress testing – have soothed the worst fears.

The signs of rekindled optimism are everywhere. A long rally has brought equity markets back from the abyss reached earlier in the year. The oil price, though still far below recent records, is pointing up. So are sovereign bond yields – indicating investors’ wariness of where public finances are headed but also a renewed willingness to tolerate volatility in stocks. The mood has changed so much that people are even willing to buy bank shares.

Governments deserve some credit for this. Comparisons with the 1930s notwithstanding, policymakers have not addressed this crisis by doing nothing. Their behaviour has not always been productive – or even seemly, as with the protectionist rhetoric of some. But they have at least understood quickly that something needed to be done.

The US government’s stress test of the country’s largest 19 banks is the latest instalment in a long series of policy initiatives to combat the economic crisis. The explicit goal is to remove uncertainty from markets about the extent of losses banks face; and to force the recapitalisation necessary to absorb them.

Many of the results leaked out in advance and markets mostly reacted with indifference. US authorities have not tried to make banks’ balance sheets look prettier than they are: their estimates of banks’ losses and earnings over the next two years in the test’s “adverse scenario” are consistent with predictions by the International Monetary Fund.

Tim Geithner, US treasury secretary, has staked his financial rescue policies on the premise that markets are malfunctioning because of radical uncertainty as much as (if not more than) real losses caused by silly investments during the boom. If he is right, there are mutually beneficial trades waiting to be made – if only market participants are given more and better information that will lift their panic.

Hence the focus on bringing transparency to the market, in the hope that this will restart financial flows and gradually reduce the need for government-provided lifelines. The market’s recent positive developments and its largely accepting reaction to the stress test give Mr Geithner reason to be satisfied: although the economy is still suffering, markets are becoming less paralysed by radical uncertainty.

Appearances may deceive: from 1929 to 1933 the stock market fell by 89 per cent in nominal terms in spite of a sequence of temporary rallies. But for now, at least, we are seeing a return to confidence. We must hope it is not a trick.