"Cecily, you will read your Political Economy in my absence," says the governess in The Importance of Being Earnest. "The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side." How right Miss Prism was. These past few days have been some of the most turbulent and frightening since the banking crisis began - and that is against some stiff competition. Yesterday alone, Barclays shares were down 33% at one point, while the pound sank to its lowest point against the dollar since 1985. The financial mess has spread to the real economy too, with the jobless total marching up to 1.92 million. But it is those febrile markets that are really worrying government officials and financiers. Judging by some of the talk around the City, the only stock worth buying is in manufacturers of tin hats.
Some of this pessimism merely reflects earlier overoptimism. That pre-Christmas lull in markets was always going to be short-lived - big financial crises play out over years, not weeks. Nor should it surprise anyone that Britain has been hit so hard in this crunch: its economy is lopsided to the point of precariousness. As investment guru Jim Rogers put it yesterday, "The UK has had two things to sell to the world over the last 25 years: the North Sea ... and the City of London." He could have gone further. The UK resembles Iceland in many ways: it too is a small country with a currency that is no longer a must-have for foreign governments (as dollars or euros are), a worrying current-account deficit and a giant banking sector. This is precisely the opposite of what investors mean when they seek out safe havens.
Against that backdrop, the pound is naturally going to be weak. Indeed, despite some ill-judged comments from the Conservative shadow chancellor, George Osborne, a drop in sterling's value should be part of the solution rather than the problem. Over the next few years, Britain will have to buy fewer foreign imports, and export more (although that will be hard amid a world recession), and one way to achieve that is through a weaker pound. For a long time to come, Britons will feel poorer. And while the Tories may rail against ballooning deficits, if they believe that politicians should step in to prevent the collapse of the financial system then that logically means extra government borrowing and the public sector taking on more of the risk previously held by the private sector. This is undoubtedly a dangerous strategy - but the other option of doing little or nothing is far riskier.
Ideally, these adjustments would happen smoothly - but markets do not work like that. Instead, they overshoot and undershoot wildly so that volatility is to be expected. British ministers and officials must also take some of the blame for not acting quickly or decisively enough. Gordon Brown sounded too sanguine throughout the first part of this crisis, which undermines the actions he is taking now. Having dragged his feet over cutting interest rates, Mervyn King, the governor of the Bank of England, is taking too long to implement the policy of quantitative easing. And the Financial Services Authority has blundered by repealing the ban on short-selling bank shares. Indeed, ministers should halt the trade of bank shares and related instruments until there is a prospect of stability. Having bank share prices jumping up and down in the middle of an intricate government rescue operation is like having hecklers in an operating theatre: dangerously distracting.
In this week's attempt to jump-start the banking system, the Treasury presented a carefully thought-out scheme. It has fizzled out largely because shellshocked financiers are not in the mood for fine details and patience. What is needed now is certainty and urgency. If RBS and Lloyds are to be nationalised, the government should get on and do it.
Copyright Speakers Corner 2017