Governments That Were Once the Solution Are Now the Problem

May.30.10 | About: BLDRS Europe (ADRU)

The current issue of The Economist has a couple of good reports about the financial market crisis, now better recognized as a sovereign debt crisis, where governments once viewed as the solution are now clearly the problem. The cover story is excerpted below and the other report is Rescuing the Rescuers.

IT’S not quite a Lehman moment, but financial markets are more anxious today than at any time since the global recovery took hold almost a year ago. The MSCI index of global stocks has fallen by over 15% since mid-April. Treasury yields have tumbled as investors have fled to the relative safety of American government bonds. The three-month inter-bank borrowing rate is at a ten-month high. Gone is the exuberance that greeted the return to growth. Investors are on edge.

What lies behind these jitters? New nervousness about geopolitical risk, with tensions rising in the Korean peninsula, has not helped. But that comes on top of two wider worries.

One is about the underlying health of the world economy. Fears are growing that the global recovery will falter as Europe’s debt crisis spreads, China’s property bubble bursts and America’s stimulus-fueled rebound peters out. The other concerns government policy. From America’s overhaul of financial regulation to Germany’s restrictions on short-selling, politicians are changing the rules in unpredictable ways (see article). And the scale of sovereign debts has left governments with less room to counter any new downturn; indeed, many of them are being forced into austerity.

The danger is that these fears reinforce each other in a pernicious reversal of the dynamics of 2008-09. Then, co-ordinated government action on a grand scale stopped the global financial crisis from turning into a depression. Now, thanks to incompetence and impotence, governments may become the problem that will drag the world economy down.

As might be expected, few fundamental flaws are seen in the current system, in fact, they conclude by noting that “the fundamentals are reasonably good”, fearing instead that some dumb politician will screw things up once again. If only the world were run by economists…