Arise, Sir Alan - while your financial era collapses

EVERY so often there occurs a ceremony whose absurdity encapsulates the reigning error of an age. Yesterday saw such an event: the award in Scotland of an honorary knighthood for services to "international financial stability" to the governor of the US Federal Reserve, Alan Greenspan.

Spin any globe corresponding to the earth. Scan any graph of financial markets across the world. In the 15 years that Greenspan has been governor of the world’s largest central bank, the US stock market has soared and crashed. It has done so in a manner not experienced since the roaring Twenties.

This stock-market crash in terms of dollar value lost has been the greatest in world history. The Dow Jones Index has fallen by 4,000 points. Nasdaq, the market for new technology stocks that carried the hopes and dreams of America’s high-tech economy, has crashed by 77 per cent. Trillions of dollars have been wiped off the value of long-term savings and retirement plans. Government bonds, meanwhile, have climbed to a level that discounts a full-blown depression in America.

That which was said could never happen again has happened. Across the world, emerging market economies have risen and fallen. Japan has gone from economic model to basket case, Europe from powerhouse to invalid. Across the Group of Seven major industrial economies, the long-term savings and retirement plans of hundreds of millions of workers have been hammered.

International financial stability? Buy some alarm clocks. There is none. This was always a cackhanded notion born out of the closed world of our Chancellor, Gordon Brown. He fantastically imagines, not just that financial stability can exist for any length of time, but that it can be conjured up out of petty footering with regulations, or high-minded motions at IMF conferences. The world is not, and has never been, like this.

I do not blame Alan Greenspan for all that has gone wrong. But I do say that throughout the roaring Nineties he allowed interest-rate decisions to be interpreted as signals that he would never let the stock market go down, or down by much. Set against that have been moments of astute, even brilliant intervention. The handling of the 1987 US market crash was one of these. The containment of the 1998 Long Term Capital Management debacle was another.

At these periods, Greenspan was a pair of hands we came to trust. But over the longer cycle, Greenspan gave the benefit of the doubt to America’s new economy miracle. He may famously have warned about irrational exuberance in 1996. But on several subsequent occasions his speeches and remarks conveyed the impression that the stock-market boom was largely validated by productivity improvements. And there is one thing central bankers should never do. That is to give the benefit of the doubt.

Buy some alarm clocks. Look at what American investors are now left with as a result of that era of excess. They are left with retirement portfolios that have been battered, earnings statements they cannot trust, signed off by accountants they cannot believe. The corporate leaders they hailed as visionaries turned out to have been driven by greed and fraud. There were the management gurus who feed those egos and stock-market analysts who ramped the shares. A pile of ruins is what’s left - that and the worst earnings outlook for a generation.

Buy some alarm clocks. America and its stock market is not going to recover soon. Given the excess, little wonder that analysts such as Bill Gross in California argue that Wall Street still has a long way to fall - to 4,000 on the Dow (currently 7,900) and 400 on the Standard and Poors (currently 853). The markets may have rallied yesterday, but the overall trend this year has been decisively downwards. Were these predictions to be realised, it would mark a fall of 66 per cent from the peak of two years ago.

Early recovery? Don’t bet on it. Long-term market watchers such as Paul Marsh and Elroy Dimson of the London Business School warn that a return to previous peaks could take ten years. The Greenspan era may have turned millions of households off equity investment for a generation.

As for those who smugly proclaim that this is just the excesses of Wall Street and that such financial instability could never be found here, buy some alarm clocks. In London, the FTSE100 has tumbled 3,000 points or 44 per cent from its peak, and by 28 per cent in the past five months. The shares of top insurance companies with whom millions have entrusted their savings have been so mauled as to trigger massive cash-raising calls to prevent them plunging into insolvency.

As if this was not enough, simultaneously there has been a stunning house price explosion riding on the back of surging mortgage debt. Last week, in one of those headlines that balance credibility and absurdity in equal measure, the Financial Times blandly reported: "Average house price may hit 1m by 2015."

This was not a prophecy for London (that 1 million average is set to come true two years earlier) but across the UK as a whole. The report was based on figures from the Halifax, which has now started to include houses worth 1 million and over in its house price index. Its prediction is based on an extrapolation of the current 19 per cent a year rate of house price increase. The average price has already been swept to 112,000.

The 1 million average semi? Buy some alarm clocks. The Bank of England has warned that the current rate of house price increase is "unsustainable". Note that word. It was often used in the final stages of Wall Street bubbleonia. In the real world, Britain’s economy is slowing, oil prices are rising, and all it would take for this housing market bubble to burst would be a modest rise in interest rates to 6 per cent to wreak havoc on thousands of debt-stretched households. And burst this bubble will.

A tumbling stock market, and a crazy housing market: how can Britain, of all countries, hand out gongs for financial stability? Is there no-one who sees that this emperor has no clothes? It is like some bizarre, mind-bending fantasy: a country struck down with collective Alzheimer’s handing out degrees in Pelmanism.

If Gordon Brown thinks that what reigns in Britain is financial stability, he must be living in a bubble all of his own. As I say, I do not blame Greenspan for all that went wrong. But for long periods of his stewardship, millions of households in America were encouraged in the view, however unintended by the Fed, that the stock market could only go up, and if it wobbled, the Fed would always fix it. Of course, it is easy to be wise with hindsight. But the Greenspan era will long be associated with a spectacular boom - and a shattering bust.

On the central issue of the nature and extent of fundamental economic improvement, he gave the evidence the benefit of the doubt: he handed out comfort. But what is the lesson of all markets and of all times? If it’s financial stability you want, there’s only one thing central bankers should ever be handing out. You’ve got it. Alarm clocks.