When a lovely flame dies, soap gets in your eyes and you lose a trillion dollars
CHRISTOPHER FILDES
How swiftly a bubble bursts, and how finally. The rainbow-coloured sphere expands before our eyes, and at the next moment they are full of soap. Nothing is gained by trying to put it together again. One year ago the dot.com bubble burst. The new, electronic economy, though doubtless cleverer and more productive than the old economy, proved to be subject to the same old laws, beginning with the law of gravity. In London, at this time last year, the spirited Martha Lane Fox was bringing Lastminute to market. Of you are thinking of buying the shares,' I said, 'leave it late and hope for a price cut.' You can buy them now at an 85 per cent discount to the offer price.) A month later I was wondering whether the new technology had found the way of letting a bubble down gently. Apparently not. Dot.coms ran out of money and burned up, and the suppliers of their technology took to issuing profit warnings. In New York, the Nasdaq market, which had been the new technology's home territory, managed to lose more than half its value. By now these losses extend to a trillion (that is to say, a million million) dollars. Even by the standards of the world's biggest economy, that is quite a lot of money to lose. It affects the behaviour of the people who have lost it. They spend and borrow and invest less, and save more. If they are banks, of course, they lend less. Some people and some banks run out of money. The central bank's legendary chairman celebrates his seventy-fifth birthday and looks Delphic. If the markets had invested less blind faith in him, they might not now have soap in their eyes.
Pop goes the bubble
FOR what can happen when a bubble bursts, we can refer to the world's second biggest economy, where the banks are under strain and the stock market has sunk back to its lowest level for 15 years. Japan enjoyed its bubble in the 1980s. Share prices and property values took off, in an economy which grew by 5 per cent a year while prices in the shops were stable. It seemed to have cracked the secret of prosperity without inflation. No such luck. The inflation was there, all right, not in retail prices but in asset prices. When the bubble burst, asset price deflation set in. By now it has worked its way through to the shops and, of course, to the banks' balance sheets. Some of this history was to repeat itself when share prices and property values took off in America. Had the legendary central banker cracked the secret of prosperity without inflation? Perhaps the inflation was in asset prices: a bubble, in fact. Not even this central banker could put it together again.
Myners' lamp
ONE reason why bubbles swell up and go pop is that investment managers all puff and blow at the same time. It is not just that they make mistakes (we all do) but that they make the same mistakes, in unison. Their natural habitat is the middle of the road, where they all rush forward at once and all get run over. Paul Myners, himself an investment manager, recognises the phenomenon, so the Treasury invited him to shine his lamp on it. Perverse regulation is part of the problem, he says. So are the pressures to run with the herd. He does not say, but he might, that too many decisions have been left in too few hands by a tax system which penalises individual investors but blesses life assurance companies and pension funds. Variety ought to be the spice of investment.
Just say No
SO much for Europe's ever-closer union. On the day of the great referendum, when asked whether they wanted to apply to join it, three voters out of four said No. This was a defeat for the government, which is committed in principle to joining, but not yet. The minister for the economy, though, said that the voters were quite right. The poll was an attempt to twist their arms, and it had failed. All agree that the cause has been set back by a decade. Our own referendum may be two years off, but the Swiss got on with theirs, and they seem quite self-sufficient, up there on their Alps. They are not scared of being shut out of their neighbours' markets, having sensibly negotiated a freetrading treaty. They feel no urge to contribute to the Brussels budget or to submit to Brussels regulation. As for their currency, why should they dream of giving it up for the euro? They might just as well scale down the Matterhorn to the mean altitude of Belgium. I have long argued that if we have to join an ever-closer union, the Helvetian Confederation is the better choice. We could begin by merging the Bank of England with the Swiss National Bank and move onwards from there. The catch is that before agreeing to all this, the Swiss would have to hold a referendum, and I suspect that they would vote to keep us out.
Ignorance is bliss
THE Competition Commission is still chewing over the banks, but, just to be on the safe side, Lloyds' bid for Abbey National was referred to it. With an election coming up, that was a certainty — but if the bid had come from Richard Desmond, publisher of Asian Babes, it would have gone through as long as his cheque did. That is how the law that governs competition works, and it helps to explain why he was the preferred bidder for the Daily and Sunday Express. Newspaper groups were ready to come up with better offers, but they would automatically have been referred to the Commission. So United, the sellers, took cash on the nail. The basic principle at work is that there is no objection to anyone buying a business so long as he can show that he knows nothing about it.
Paint your wagon
THE chaps at Lovell Consulting have been looking forward to the Budget, which they expected to include a capital allowance to encourage green technology. Already, they say, £19 billion a year in tax is saved through these allowances, and Lovell specialises in advising companies on how to claim them. (This year, paint your expenditure green.) A reforming chancellor would scrap all these allowances and slash the rate of tax, as Nigel Lawson did, but letting people or companies make their own choices and spend their own money has never been Gordon Brown's idea of tax reform.
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