IPSOS-Mori have produced a fascinating trend report called Ten Years of Blair, where they've produced graphs of trends on everything they've polled about since 1997.Of particular interest is the graph for Economic Optimism (from page 43 of the report). In 1998, the hedge fund LTCM collapsed, Russia defaulted on her debt and the "Tiger" economies of the Far East saw a massive flight of money as the capital markets took panic. Conditions were similar to today. Liquidity collapsed, all banking share prices were marked down regardless of whether they were exposed to the problem countries and the Fed and other central banks struggled to pump liquidity into the markets to stabalise them.
Take a look at the graph to see what happens to economic optimism in the UK in 1998 (click on it to enlarge if you are having trouble viewing). Captains of Industry, MP's and the general public alike assumed that the crisis would affect the economy and confidence nose-dived. The economy however continued to grow healthily at a pace not that far off the current one (the dotted green line). Once everybody realised that the crisis had left the economy unharmed, optimism promptly recovered. There was more to the economy than the banking sector, even though participants in that sector have the knack of screaming loudest.
What happened in 1998 is not that different to what is happening now. For exposure to loans to the Russian and Far-Eastern economies, simply substitute exposure to US sub-prime paper. Labour people should hold their nerve. Just because the newspapers are in full panic mode and saloon-bar Tories talk incessantly about "the coming economic crisis" doesn't mean there will be one. The jury is still out as to whether the travails in the banking sector are affecting the real economy.
3 comments:
Property prices were far less overvalued in 1998 than today, though.
Property prices in 1998 still hadn't entirely recovered their 1990 levels in many parts of the country. However interest rates were much higher (base rates were about 7.5% when the Asia crisis started if my memory serves me well).
There is a myth that undervalued housing helps the economy somehow - in fact you are making this very point. But in practice, people feel too scared to buy, because they think prices will go down still further, and there is a sort of paralysis.
I remember trying to persuade a work colleague to buy his first house during this period because I thought it was a massive opportunity. But he thought it was a massive risk of going lower, what with the scare stories in the press of the risk of recession from the Asia crisis, plus the experience of the housing downturn of the previous seven years, and he didn't buy till 2000 when prices had increased quite a bit. He paid more (and borrowed more) but he felt safer! The majority of the public is like him.
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