Markets cannot be investors when we need them and vigilantes when we don’t.

30th August, 2010

Economy / Financial

In the midst of this economic depression we are painfully short of heroes. Maybe because of this there is no shortage of villains. If a villain wields great power over your destiny then it’s preferable if they are faceless, not based in Ireland and if they already have a bad reputation. That way by attacking them you have little to lose.

The financial markets and their rating agencies fit the bill perfectly. Their role in causing a collapse of the global economy is beyond doubt. This week they were again the recipients of public criticism.

The decision of a rating agency to again reduce Ireland’s credit rating is ‘flawed’. The bond markets were recently described as ‘vigilantes’.

This sentiment is not just confined to Ireland. President Sarkozy vows to ”mercilessly confront speculators”. It’s why many of the leadership contenders in the British Labour Party are bashing the markets almost as much as they are bashing their ex-leaders .

Speculators, investment banks and rating agencies are seen as bringing ordinary working people to their knees.

However we must be clear that this is a convenient way, yet again, of our Government avoiding blame. And it is not hard to see why this line is spun.

The financial markets today wield the power bequeathed to them by a Government who overspent and wasted tax payers’ money. It is that simple. They have so much power because it was given to them by this Government.

If bad budgetary policies had not been followed, and structural debts were smaller, then the bond markets would have less power. It is not the fault of the bond markets that we have to borrow €20 billion per year after having run budget surpluses for so long. Finally, it is exclusively the fault of this Government that they got the cost and strategy for dealing with our banks so gruesomely wrong.

The financial markets are not blessed with perfect knowledge and wisdom. Far from it.

For many years they loaned money to Ireland at the same rate as was made available to Germany. Similarly, the role of credit rating agencies in mis-rating debt and then exacerbating the problems of elected governments has to be urgently reviewed.

But they are pointing to what many of us know. That any progress made in dealing with problems is slowly been eroded by the mounting cost of the bank rescue plan. The Government got the cost of this plan wrong and their strategy wrong. Blaming financial markets is far easier to do than facing up to this truth.

What is also insidious during this year is the sight of hapless government ministers claiming that their hands are tied and they must act “patriotically” to make the cuts that are being demanded of them by the markets.

This is normally followed by a healthy dose of self-congratulation when the markets praise said cuts and use words like “stability” and “confidence”. Fianna Fail have perfected this bad market-good market routine in the last couple of years.

This Government did not complain when they using the bond markets to fund spending in the past. Markets cannot be investors when they need them and vigilantes when they don’t.

If we accept that responsibility sits with someone else, then so does the power to rescue ourselves. We can’t do that. It is bad – bad politics and bad economics.

We are victims. But not of the financial markets, but of decisions made at home that handed too much power to city boys and rating agencies.