IT was Thomas Sowell, the American economist, who said “there is nothing so bad that politics cannot make it worse”. In recent weeks, politicians have tested that maxim to destruction. From horse-trading over the US debt ceiling to cack-handed policymaking in Europe, almost every political intervention has served only to fan existing fears over the global recovery.
As they downgraded their global growth forecasts yesterday, analysts at Morgan Stanley blamed “Europe’s slow and insufficient response to the sovereign debt crisis” and the “drama around lifting the US debt ceiling” for an erosion in business and consumer confidence. At every turn, politicians have poured fuel on the flames.
Yesterday, it was the effect of the short-selling ban in four European countries that exacerbated the sell-off in equities. Traders who were unable to hedge against a variety of long positions decided to sell out of those stocks instead, causing liquidity to dry up.
Clearly politicians and regulators haven’t learnt anything from the deluge of evidence that shows short-selling bore no responsibility for the last financial crisis, nor the fact that the 2008 ban did nothing to stop bank stocks plummeting. It is as if policymakers are watching an action replay in the hope that the finale will somehow play out differently.
Plans for a Tobin tax on all transactions in the European Union, backed by France and Germany, weighed on financial stocks earlier in the week. Markets had hoped that Nicolas Sarkozy and Angela Merkel would outline a way of dealing with the sovereign debt crisis; it beggars belief that the best they could come up with was a spiteful €200bn tax that only served to push sentiment even lower.
The irony is that markets need politicians now more than ever, because Europe has to find a way of solving the debt crisis. One can debate the pros and cons of the various solutions – an orderly break-up of the euro, fiscal integration of the Eurozone or bigger bailout funds – but one can’t ignore them.
As the financial turmoil unfolded, Britain’s leaders were sunning themselves in Tuscany and Los Angeles. It took the worst rioting in a generation to force them to return, and even then only after the worst was over. When the country was in crisis, there was a vacuum at the top.
Politicians across the pond are hardly setting an example. The disgraceful stand-off over the debt-ceiling, and the messy compromise and downgrade that followed, set the tone for a truly awful August.
As the Democrats and the Grand Old Party squabbled, China – America’s biggest creditor – flexed its muscles, issuing a hectoring statement through state-owned news agency Xinhua.
“The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” it said.
When the only people talking sense are Chinese propagandists, it’s a sure sign that things are not as they should be.
•Allister Heath is away