13th August 2012
Yet, in the absence of any radical policy solutions the markets do not break out of their narrow range. Five years on from the Wall Street Crash, Franklin D Roosevelt brought out the New Deal. Is it time for a more radical appraisal of the global financial crisis?
A new ‘New Deal'?
Bill McQuaker, deputy head of equities at Henderson, believes that the 1930s may provide a good reference point when examining today's political and economic challenges. He says that FDR's path at the time looked ‘extraordinarily radical': "Under the New Deal, he proposed a multitude of measures that included massive increases in public spending and considerable government intervention in the financial sector to stem the wave of bank failures. It seems that this radical policy was successful: under FDR, the US experienced compound annual GDP growth of 8.5%."
McQuaker believes that – after a difficult start – Thatcherism paved the way for a period of substantial economic expansion and a very strong stock market performance. These were both revolutions in their own way. He says: "There has to date been a distinct lack of creative thinking on the part of politicians and policymakers. Looking to the past, Roosevelt's revolutionary ideas while unconventional were effective in moving the US economy forward. There have been few signs that European leaders have been thinking outside conventional parameters: their current ‘solutions' just aren't working."
We need radical solutions
The radical solutions, where they have been proposed, have tended to come from the ‘fringe' of European politics. For example, McQuaker points to Italy's Berlusconi as one of the few politicians who has thought differently on the Eurozone crisis, suggesting solutions as radical as Germany leaving the Euro, or the weaker Southern countries leaving the Euro.
There have been radical solutions by think-tanks, analysts and economists. There has even been a solution proposed by an 11-year old boy.
However, none have yet been adopted by mainstream policymakers within Europe, who remain wedded to the Eurozone project in its current guise.
On the other side of the pond…
The US is also on the hunt for a new ‘New Deal'. Will it come from Mitt Romney? Romney's tax plans are the subject of heated debate in the run-up to the election, but his plans to cut taxes for the wealthy are certainly radical at a time when wealth is seen as a social problem. Here is his version of his tax plans: "To repair the nation's tax code, marginal rates must be brought down to stimulate entrepreneurship, job creation, and investment, while still raising the revenue needed to fund a smaller, smarter, simpler government. The principle of fairness must be preserved in federal tax and spending policy."
He plans to eliminate death taxes, lower corporation tax, keep all the tax incentives brought in by George W Bush. He wants to issue Obamacare waivers to all fifty states and promote free market and fair competition in healthcare.
His plans have been widely derided on the left: "Folks making more than $3m a year – the top one-tenth of one per cent – would get a tax cut worth almost a quarter of a million dollars" under the Romney plan, Mr Obama told the rally in the Mansfield town square. "And guess who gets the bill for these $250,000 tax cuts? You do." he said, citing a report by the non-partisan Tax Policy Center in Washington.
Part of the problem is that Thatcher and FDR only had one country's problems to solve. Today's politicians have a lot of global variables with which to contend. One radical solution in the US could be undone by, for example, weakness in the Eurozone. This is undoubtedly contributing to political paralysis.
But until someone comes up with a genuine big bazooka, in the US or the Eurozone, markets will continue to be at the whimsy of politics: "Economists are blaming slowing jobs growth and consumer spending on anxiety over Europe's debt crisis and the so-called "fiscal cliff" – the expiration of Bush-era tax cuts and the i
mposition of $1tn in spending cuts set to occur on 31 December unless a political compromise can be reached.
"Bernanke is concerned too…But a third round of quantitative easing (QE3) could spark a political firestorm with Republicans ahead of November's election."
A take-out for investors?
And McQuaker's solution for investors faced with this headwind in markets? He admits that one option would be to ‘seize the day' and own risk assets, which continue to look cheap, but adds; "I have to say that while that might make sense for some investors, it doesn't work for everyone: some will struggle with the stresses of ignoring the short-term noise … Instead, we propose another strategy. In our multi-manager portfolios, we feel we have a judiciously selective collection of risk assets, but we are also employing some hedges – these currently have a US flavour and incorporate US treasuries, US dollars, and trading volatility in the US market."
A new ‘New Deal' – and the political will to implement it – still seems some way off.
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