No easy answers to our economic problems

23rd September 2011

Mindful Money sought the views from the blogosphere at the end of the turbulent week to look for solutions, observations and contrarian points of view, and see if there is anything to be cheerful about. 

Here Bronte Capital's John Hempton suggests two scenarios for Greece which is of course a scenario for Europe and the World these days.

He suggests first that Greece might default and come out of the euro and devalue, but the site argues the rest of Europe would have to get their currencies back too otherwise all the other countries on the periphery will see bank runs.

The alternative is that Greece defaults and stays in the Euro. In the second variant Greece has a huge problem after the default – which is that its banks are insolvent. The recession goes from bad to worse and the government deficit goes from bad to worse. The Germans wind up owning the banks and the telephone company in Greece as partial offset to their losses lending to them. And no-one is cheerful.

The BBC's economics correspondent Stephanie Flanders on her Stephanomics blog says many economists and politicians know exactly what is going on. Could this be the elusive good news?


Writing from a meeting of finance ministers, she says: "What makes some here really gloomy is not just that politicians seem to lack political will – or a good understanding of the scale of the problem. Many of them have that already.

"The real worry is that even when politicians in Europe and America decide they will take the difficult steps that the IMF and the markets are asking them to take, the current state of their political institutions simply won't make it possible for them to do it."

And she is moved to quoting poetry from T S Eliot's "The Hollow Men"

Between the idea and the reality

Between the motion and the act

Falls the shadow

London Banker suggests drastic action with countries wreaking revenge on Wall Street. "I'll add a suggestion about what I would advise the eurozone finance ministers. I would advise them to have every EU state with off balance sheet, hidden liabilities on derivatives – whether undertaken for window dressing to gain admission to the eurozone or any other purpose – to default on any further margin or resettlement payments. The Hammersmith and Fulham defaults of the late 1980s proved a wonderful discipline on the investment banks, schooling them in the limits of preying on local governments. It might be time for another lesson at the national level."

Anger but not happiness there.

Zero Hedge's Tyler Durden believes he has spotted why there are problems for US money market funds, French banks and all. US Treasuries have not been paying enough for the funds to give anything back to their investors (and pay their fees). That has tempted them, in the past few years, to look for other sources of return. For example French banks which in normal times represent a pretty safe bet. That is why the US is so concerned about this interconnected world.

The Big Picture's Barry Ritholtz asks what should investors do now? So is there some hope?

Nope. He says it's the wrong question. 

As in – "The bottom line remains that investing is a proactive – not reactive – endeavor. If you respond to every twitch, every news story, each turn of the wheel, you will become whipsawed. That is no way to invest. And it's no way to live life, stressing out over things that are out of your control.

"What you can do is anticipate events that are cyclical in nature. These major shudders repeat every few years, so we should not be surprised by them. Construct a plan that allows you to ride out these events without panic or forced errors. You need a plan that anticipates these regular occurrences."

So in summary if you had a plan a few years back you're ok.

Perhaps we should have known. Even Warren Buffett is $6bn down as the latest Forbes 400 wealth list shows. We wonder if he still wants to pay more tax.

So we can't fix it ourselves, but could the Chinese come smiling to the rescue. 

The BBC business editor Robert Peston is in Shanghai blogging from a party hosted by Richard Branson. And perhaps it all right for some.

 "China is a world away from slump – and the mood among the Chinese elite is that their country is better protected from the turmoil in the developed world than it was during the great banking crisis of 2008, when China's economy temporarily ground to a halt.

"That may be naive. But it also means that although the financially strong Chinese government and Chinese businesses are in a position to help the ailing richer economies – by lending to countries with excessive debts, like Italy, by investing in companies short of capital, even by backing infrastructure projects that create jobs – they will strike a hard bargain."

So the creditor holds the cards – and that's not great for the West.

So perhaps investors should play the China card. One person who might agree is

Fidelity star fund manager Anthony Bolton who still believes, yes that's still believes we are in a global bull run for equities as reported in trade magazine Investment Week, though he thinks we are seeing the emergence of a two speed world but that is becoming ever more apparent.

So maybe China is the answer long term. You might as well own a bit of it, if it is going to own a lot of us. But we suggest you take advice first and maybe not do anything rash. Roll on next week.

< p>More from Mindful Money:

Market crash: Headlining and tweeting our way to volatility

IMF cuts world growth forecasts

Beware TV reporters offering investment advice about stock market falls

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