Jeremy Warner's Outlook: Decision to hold rates defies credit gloom

If we've just experienced the worst banking crisis in more than a generation, there's very little evidence of it in share prices, which are again trading close to their all-time highs. Even the banking sector itself is not looking too badly damaged, with share prices now well off their 2007 lows. How to explain this apparent paradox?

One fairly obvious explanation is that, notwithstanding the turmoil in credit markets, investors still don't believe there's about to be a recession. That view was reflected in coincidental decisions yesterday by the Bank of England and the European Central Bank to leave interest rates on hold. If they'd thought the economy was about to fall off a cliff, they would have acted. Even the uber-hawk Mervyn King is not going to stand idly by while the economy plunges into the abyss.

That doesn't mean the credit crisis is over, or that it won't have adverse long-term consequences for the real economy. Only a fool would bet on that.

What's more, the US economy plainly is in some difficulty, with its massive overhang of unsold houses. Until this is cleared, construction and consumption will look subdued. Yet for the UK and to some extent Europe too, the picture doesn't look so bad.

Only a few months back, the consensus view was still that interest rates would need to rise further to choke off inflationary pressures. A lot has changed since then, but not so much that it warrants an immediate cut. The situation is not yet as serious as it is in the US.

Continued strong growth in Asia gives good cause for believing that this time around the world economy will be better protected from the full force of an American downturn. Likewise, share prices, even in the US, are much better sheltered than they used to be from US recessionary pressures. Both the S&P 500 and the FTSE 100 are these days more mirrors of global trends in corporate profitability than narrow domestic ones.

Despite the credit crunch, there is still an awful lot of liquidity out there in the world economy looking for a home. In an age when debt has become mistrusted thanks to the snake-oil salesmen of Wall Street and the City, good, old-fashioned equities all of a sudden have their merits once more.

Even the most opaque of corporate balance sheets look like models of transparency compared with some of the triple A- rated and now essentially worthless debt instruments the investment bankers have been marketing with such abandon.

Bernanke wrong to hit the phone

My goodness, was Ben Bernanke, chairman of the Federal Reserve, active in consulting the markets when they began to turn against him after his decision in early August to leave interest rates on hold. According to records ferreted out under the US Freedom of Information Act by Kenneth Thomas, a lecturer at the University of Pennsylvania, he seems to have phoned all and sundry, including Robert Rubin, chairman of Citigroup, the Wall Street legend Lewis Ranieri, and Raymond Dalio, president of one of the US's largest hedge fund managers, Bridgewater Associates.

Soon after, he began to flood the markets with liquidity. There followed a cut in the discount rate, and then, a couple of weeks back, a full half-point reduction in the Fed funds rate. The markets spoke, Mr Bernanke apparently listened, and then acted. Not so Mervyn King, Governor of the Bank of England. The records show that Mr Bernanke also spoke to Mr King, but Mr King's response was to ignore what the markets were saying and attempt to tough it out.

Mr King has been widely criticised for his inaction, yet it is still far from clear either that he was wrong in refusing to give in to the siren calls of the investment bankers or that it is entirely appropriate for a central banker to be consulting so widely in the markets on what he ought to be doing.

Of course, we don't know what was said between Mr Bernanke and his correspondents. Even the US Freedom of Information Act stops short of giving that kind of detail, more's the pity. Yet it is reasonable to assume he was consulting both on how serious the credit crunch was and what might be the appropriate response.

Critics of Mr King cite his unwillingness to listen as a key difference in approach which has served Britain badly during the credit crunch and possibly contributed to the near collapse of Northern Rock. Well, maybe, but ignoring Northern Rock, which in the scale of things is a comparatively minor corporate disaster of limited long-term consequence for the capital markets, the banking crisis has not been notably worse in London than either the US or Europe.

By consulting selectively, a central banker risks becoming both the creature of vested interest and in effect giving an inner circle of favoured players privileged access and information. This cannot be the right way of going about things either. Commentators will argue the toss over these issues for years to come, but for now the last word ought perhaps to go to Alan Greenspan, who recently said: "If the Bank of England Governor, Mervyn King, who is one of the best central bankers I have ever met, cannot effectively manoeuvre through all of the problems there, I don't think anybody can. So let's not fool ourselves into believing we can. We [central bankers] are surely less powerful than people think we are". Quite so.

Clutching victory from jaws of defeat

Barclays has done a remarkably effective PR job over the past week in presenting the now-certain prospect of defeat in its battle for control of ABN Amro as glorious victory. By the same token, the real loser in the saga is painted as the Royal Bank of Scotland-led consortium of European banks, which now sails home to victory.

Full marks for spin, but it is, of course, complete nonsense. The only real positive that Barclays takes away from months of trying is that in the end it resisted the temptation to overpay. In all other respects, its chosen strategy lies in tatters. The link-up with China Development Bank provides a limited alternative, but has failed in its primary purpose, which was to so energise the Barclays share price that it would ensure success in the main action of bidding for ABN.

Nor does the idea that RBS is about to fall victim to the "winner's curse" stand up to serious scrutiny. RBS's Sir Fred Goodwin obviously wouldn't be paying as much as he is if he were able to wind back the clock and, with the benefit of knowing about the looming credit crunch, start again.

Yet his determination in holding the consortium together and pursuing a takeover which everyone said at the beginning couldn't possibly succeed has been really quite remarkable. Both in execution and delivery, Sir Fred's record is second to none. Nobody should doubt that he will hit and probably exceed the targeted €1.7bn of cost cuts. On RBS's €15bn share of the takeover bid, that's not a bad return.

Chancing your arm against BSkyB

On all sides, BSkyB seems to be under regulatory siege. Earlier this week, the Competition Commission said it might force Sky to divest its stake in ITV. Now Ofcom is threatening to block Sky's plans to offer pay-TV channels on Freeview. Sky would say it is being attacked for its own self-generated success. Competitors, real and potential, counter that to survive and prosper against such a dominant player, they need special protections and privileges.

Yet it is faintly odd that in order to generate more long-term competition to Sky in pay-TV, regulators need to be making the market less competitive and, by keeping Sky away from Freeview, provide less choice to consumers. One of the most active complainants against Sky is David Chance, head of Top-up TV. He should know what he's dealing with. He used to be BSkyB's deputy managing director.

j.warner@independent.co.uk