2008 all over?

When the United States Federal Reserve Board announced its 'twist' operation last week, in which it will exchange short-dated maturities for long-dated ones in the hopes of bringing down long-term interest rates and thereby raising investments, stock markets tanked. Financial analysts jibed that the operation should be more aptly dubbed 'twist and rout'.

So then, the finance ministers of the G20 countries, assembled in Washington for a summit meeting, puffed out their chests and declared they would take all necessary measures to stem the growing financial panic. Markets promptly fell further. What next? Will the Rock walk out and threaten to put a spinebuster on everyone?

At least he'd be credible. Let's try to picture a summit meeting, any summit meeting, of the world's leaders. After the latest version of the 'all necessary measures' declaration, the leaders congratulate themselves, shake hands and prepare to go their separate ways.

Barack Obama then says, in parting, "Angela, it's going to take me a while to get this past my Congress. They keep making fun of my ears and saying I'm too skinny and won't listen to me. So you take charge for a while, until I can make good on my commitment."

Can't sell another bailout

Then German Chancellor Angela Merkel says, "Listen, Silvio, Barack wants me to handle this, but I can't really sell another bailout to the German just now. Every time I try it, another state votes my party out of power. Do me a favour and pass real economic reform, then I can tell my people you southern Europeans are finally getting serious."

Italian Prime Minister Silvio Berlusconi then turns to David and says, "Listen, David, I've just finished six Red Bulls and have a busy night lined up in the Bunga Bunga lounge. I may take a few days to recover. You hold the fort for a while."

Whereupon British Prime Minister David Cameron says, "You Europeans are all such losers. We never should have rescued you in the war."

And on it goes. You get the picture. Investors are looking around like a bunch of kids in a schoolyard who feel a fight will break out, but see no teachers around. So far, the sell-off in global markets has been fairly orderly. It may remain so, if the world's leaders can finally find a way to look serious about their pledges.

But the risk is that fear will turn to panic. Investors are, in effect, voting non-confidence in their governments. And when confidence goes in the governments and central banks of the major countries, investors will try to sell everything and get out. And if that happens, asset values will collapse. Capital levels at banks will drop, and a new financial crisis will set in. Some are warning it could be even worse than 2008.

Strong leadership

The world needs good leader-ship, and it needs it now. The best hope is that government leaders will get the message. Central bankers are all but imploring them to take the reins, admitting that there is little left they can do through monetary policy. Markets need to see plans to restore short-term growth, while tackling the long-term expansion of deficits. Instead, governments are doing the opposite: cutting in the short term, while not addressing the serious structural problems besetting their economies.

Among these is the inexorable upward path of debt, as a result of the growth of public spending commitments on pensions, health care and government salaries. Jamaica is hardly unique. It is a widespread challenge. Avoiding it saves pain in the short term. But it just bottles it up for the future. If politicians won't deal with it, investors will send the message.

It is galling that it takes private money to do what public officials won't. But in the absence of a responsible adult, you can only hope that the biggest kid in the schoolyard isn't a bully.

John Rapley is a research associate at the International Growth Centre, London School of Economics and Political Science. Email feedback to columns@gleanerjm.com and rapley.john@gmail.com.