The corridors of power …

So far I have had to answer a lot of questions about what falling share prices mean for City bonuses and pensions but it could well get a lot more serious.

Everyone remembers that the Wall Street Crash of 1929 brought on the Great Depression but most people have forgotten that it took two years for it to do that. A more realistic comparison might be the Japanese economy.

Hailed in the 70s and 80s as the miracle economy, shares in 1989 peaked at 39,000 and are below 10,000 now. The property market in Japan has lost four fifths of its value since it topped out in about 1992 – despite the fact that the Bank of Japan has kept interest rates at close to zero for years and the government has pumped trillions of dollars into the economy.

The reason that hasn’t worked is because the problem wasn’t the high cost of borrowing or lack of government spending. It was an unsustainable banking system which no one would allow to go bust for political reasons, and a total loss of faith in how the economic system works.

This brings us to the US. With interest rates already down to 1.75%, there is pressure on the Federal Reserve to cut them further. But this begins to smack of panic and as the Japanese economy shows us, it is probably not the answer. The US stock market has collapsed because of corruption and bad investment decisions, no one trusts it at the moment and lower interest rates will not change their minds.

Which means Alan Greenspan has a tough time ahead. Ironically, the British government has awarded him an honorary knighthood for his outstanding contribution to global economic stability. Let’s hope this judgement is right because his toughest tests are still ahead of him.

  • Jonty Bloom is business news reporters at the BBC.

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