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Realism for recovery

The financial sector has likely never been so loathed by so many – markets, politicians and consumers.

At the time of writing, police are mounting an unprecedented level of security around the G20 summit in London and expect mass protests over the economic crisis to last into the summer. For the world leaders, the major focus will be how to get failed the global financial system working again.

Across the markets, faith in the financial sector is still fragile despite the announcement of the asset protection scheme in the UK, which aims to underwrite up to 90 per cent of any loss of a pool of ring-fenced assets and, in the US, a capital asset program and proposals for the balance sheet health assessment of 19 financial institutions.

The US has traditionally been thought of as a defensive market but in February it led the other markets down, providing a conundrum for investors. One reason for its poor performance is politics. Unlike some of his predecessors, the ascendancy of Barack Obama has been marked by realism rather than expediency. He does not seem to be contemplating a short-term panacea for the economy but rather remedial actions directed at bolstering the nation in the longer term.

His inauguration speech issued this warning: “Our economy is badly weakened, a consequence of greed and irresponsibility…the challenges we face are real…they will not be met easily or in a short span of time”.

Americans have grown used to promises of relatively painless quick fixes and initially this message did not play well. As the months go by, some may decide their snap judgment was too pessimistic.

It may be helpful to look back to the era when Ronald Reagan assumed power and the government took quick and deep action to fight spiralling inflation. Under Paul Volcker, the then chairman of the Federal Reserve, the Federal Funds rate, which had averaged 11.2 per cent in 1979, was raised to 20 per cent in June 1981. These manoeuvres and the ensuing recession were deeply unpopular but arguably laid the foundation for a very successful presidency. Will history record that Obama followed a similar game plan – no pain, no gain?

In the UK, senior bankers were recently humbled through being summoned to appear before the Treasury select committee but failed to give any convincing rationale as to why banks had suffered such a fall from grace.

For consumers feeling the pinch, “fat cat” pension and bonus schemes seem insulting. Excessive performance-related pay has never been an agreeable subject, but in the stark reality of failure, accountability has never been such a hot topic.

At some point, the financial sector will become a hero again but it is clear that there is a way to go. In the meantime, the healthy bout of realism demonstrated by global leaders should help steer a path to some form of recovery.

Bill McQuaker is head of multi-manager and head of equities at Henderson Global Investors


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