London’s day of shame: plunging markets, mob rule and absent leaders

Allister Heath
THESE are terrible, depressing times. London is burning. Gangs of criminals have been allowed to roam unchecked, with our horrifyingly powerless authorities failing to bring the situation under control. To those of us who love London, yesterday was a day of gloom, shame and shared pain. The images of dozens of shops, homes and cars on fire in many parts of our great city were almost too unbearable to watch. How can a city which is hosting the Olympics next year be so unprepared and unable to deal with rioting, large-scale fires and violent disorder? Why are our authorities so debilitated? Boris Johnson and David Cameron are both belatedly returning from their holidays today.

Dealing with this crisis is the biggest challenge yet to both men’s political careers: unless they urgently stop the chaos, radically reform the police and ensure this can never happen again, they will never regain the trust of the people, especially of their law-abiding, hard-working base disgusted by the scenes of pillage as well as by those making excuses for the savagery.

The fact that all of this is coinciding with a period of major turmoil in the markets merely adds to the fin-de-siecle gloom. It was not just that the US markets took another sharp tumble – many European markets are now down by a quarter over the past six months, the Vix fear indicator rocketed almost 50 per cent, gold hit new records, oil tumbled and Bank of America’s share price crashed. None of this (apart from oil) will do the real economy any good: yesterdays’ leading indicators for the OECD economies suggested a further slowdown in growth. We are not yet in recession territory but the chances of one starting in the US or the Eurozone – and thus contaminating the UK – are increasing. All eyes are now on the Federal Reserve’s meeting tonight, with the main question whether or not more quantitative easing is on the cards. But printing more money right now would be a disaster: it would send a message that the Fed will intervene whenever the markets dip, further fuelling the madness and moral hazard that has been at the heart of the US economy’s woes since the late 1990s.

The US stock market is only just back to its long-term price to earnings ratio after yesterday’s sharp declines. US stocks are thus far from over-sold and could fall further. US Treasury yields are at rock-bottom: at one point yesterday the 10-year was at just 2.32 per cent, the lowest since January 2009. On the face of it, this is absurd – interest rates should be going up to account for increased risk. But the bond market remains in a massive bubble: financial institutions and Asian governments retain an insatiable appetite for the bonds, for regulatory reasons or because they have nowhere else to go. And many in the markets are downgrading their long-term forecasts for nominal economic growth in America and thus believe that the long-term rate of return has slumped. Stocks performed better in Europe than they did in the US, largely because of the European Central Bank’s bond-buying programme. This is likely to change when investors realise that it won’t be as large or effective as they hope. The ECB’s policy appears to be to buy €5bn or so worth of debt a day, while sterilising the purchases to make sure they don’t boost the money supply. It is thus not QE.

In the meantime, the situation in Britain, once again, is being destabilised by domestic incompetence. Public spending will account for 50.1 per cent of GDP this year, a huge amount, according to the OECD, and yet the state is incapable of protecting people’s lives and property. It is failing to fulfil its most basic function. Ken Clarke, the hopelessly soft justice secretary who has advocated reducing prison sentences, needs to be sacked. Theresa May, the home secretary, needs to drastically up her game. Following the failure to crack down properly after previous riots over the past year, criminals now believe that they will be either entirely unpunished or left off very lightly if they engage in looting. The message this sends to foreign investors and tourists (the latter being one of the bright spots of the economy, thanks to the low pound) is awful. Once again, the UK is shooting itself in the foot – at the very time that it could actually be standing out from the crowd as a country that has (just about) regained control of its public finances. Instead, we stand discredited, in flames and utterly powerless. How pathetic – and how shameful.
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