Last Sunday morning it seemed that the world was going to come to an end due to the systemic collapse in the financial markets and the rest of the economy that had been predicted by the head of the International Monetary Fund.
In spite of the fact that the US Congress had authorised a bailout of financial institutions in trouble to the tune of $700 billion, the financial turmoil continued as evidenced by the total blockage of the money markets and as evidenced by the fall in the value of equities quoted in the stock markets.
This turmoil was most certainly made worse by the lack of any meaningful agreement within the EU on how to address the crisis that only got worse by the hour. At some point, over the weekend, there appeared to be a consensus that the crisis in the financial markets was about to hit in an irreversible manner, the so-called real economy, thereby leading to a total collapse of the world’s economic system.
The head of the IMF did not mince his words when he addressed the media last weekend and even started pointing fingers at the politicians, claiming that the latter had not heeded the advice of the IMF experts.
Then the heads of government of the eurozone met on Sunday evening. At one stage the meeting was suspended and the eventual press briefing was delayed. It emerged, later, that all decisions taken at the eurozone meeting were being coordinated with the UK government, such that by the end of that meeting a unitary position was agreed upon.
Eurozone member states were left with an element of leeway as to what actions they could take, but essentially there was a common position that certain financial institutions needed to be recapitalised with public funds, that savings had to be guaranteed, and that the money markets (through which interbank lending takes place) had to be unblocked and supported.
The whole world heaved a sigh of relief, the economic collapse appeared to have been avoided and the financial markets responded very positively by making gains across the board last Monday.
Those gains continued during the first part of Tuesday, but by the evening the euphoria was over, with US markets closing with a negative sign, and with the European markets doing the same on Wednesday.
It was obvious that on Monday investors bought at exceedingly low prices and sold again on Tuesday and Wednesday at higher prices, thereby making a gain on that speculative behaviour, but still causing share prices to fall. It was also obvious that business confidence takes much longer than 48 hours to pick up.
The days after last weekend showed that the measures agreed upon at the end of last weekend within the EU would only stop the collapse, and that further vigorous action was required to put the economic system back on more solid foundations. People are still not believing that the recession in the real economy will be avoided.
They also showed that the speculators on the stock markets felt that they had not yet had their full share of whatever gains could be made and, were the first off the mark on Monday with their buying and equally first off the mark on Tuesday with their selling.
The Italian Prime Minister, Silvio Berlusconi, declared publicly that those that have made a lot of money from the increase in the price oil in the last 24 months, are flush with funds and could intervene in the stock markets at will (in other words could speculate at will). And until those speculators are brought into check (for example making short selling illegal permanently and not only temporarily), we will continue having the shocks that we have experienced these last weeks and again this week, when everything should have got back to normal.
In fact, one wonders whether we have learnt anything at all in the last weeks. One gets the feeling that we have not. Admittedly, the EU and the US have sought to coordinate their response to the crisis in the financial markets, but one recognises that this was done only out of necessity.
British Prime Minister Gordon Brown has been quoted as saying that the decisions taken last Sunday were only the first step to bring back some stability in the financial markets.
He added that we now need to move on to the next step to ensure that what happened will not occur again. However, the US Treasury Secretary, Henry Paulsen, admitted that he was not terribly happy with himself at having to intervene directly in the financial markets, because it simply went against his grain.
This immediately gives rise to doubts as to whether the proposal to have more coordination in the regulation of markets around the world will ever get off the ground. It seems that policymakers are happier at proving themselves right than doing what is right. Coordination will become more difficult if the world economy does actually move into a recession as is being feared. At that stage one would expect governments to look at national interests first and foremost to safeguard employment and incomes, even if at the expense of other countries. The story continues to unfold on a daily basis.
In Malta we keep asking ourselves the question as to how these developments will affect our economy. To think that we will escape unscathed is wishful thinking. To hope that our economy will prove once more that it is resilient is justified. It seems that the days after last Sunday have still left a number of questions unanswered, and economies do not perform well when there is uncertainty.