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David Callaway
May 20, 2010, 2:58 a.m. EDT · Recommend · Post:
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In markets tug-of-war, gold holds the key
First Take "?
Bull market camp loses a top performer
By David Callaway, MarketWatch
SYDNEY (MarketWatch) -- Less than 20 months after unregulated derivatives trading almost destroyed the global financial system, and less than 20 days after unexplained electronic trading systems gave the U.S. stock market a 1987-crash-like scare, the siren song of free-market capitalism is fully back in the driver's seat when it comes to regulation. Politicians the world over are on the run, and investors should be scared.
In Germany, Chancellor Angela Merkel is described as desperate for trying to halt a run on the country's prized banks by halting abusive naked short-selling in their shares. In the U.S., the SEC is blasted for trying to place circuit breakers on trading to prevent another "flash crash" from occurring. In the U.K., a weak coalition government is hopelessly outmanned by the City of London as it tries to rein in obscene banker bonuses. And here in Australia, a once-popular prime minister's plan to put a new, higher tax on mining and resource profits has caused a national outbreak of bleating against his leadership that could even hound him from office after just one term.
Each of these plans represents a natural reflex by political leaders to do something -- to lead -- when their countries are threatened by external or internal forces. But the reaction of the markets and big business against them has been so violent that it's become clear the lessons of the global financial crisis, or "GFC" as they say Down Under, have been completely lost to business and to investors in less than two years.
John Lipsky, first deputy managing director of the International Monetary Fund, answers questions about taking action on the euro and intervention in Greece.
Unlike in the 1930s, where the lessons of the Great Depression led the U.S. government to dramatically change how Wall Street was regulated for the next 70 years, most of the mooted changes in Washington and around the world since the fall of 2008 have already been nullified. The financial reform bill on Capitol Hill faces more dilution by the day as the Democrats struggle to get it through, and any attempts in Europe to get a handle on the markets are met by a swift sell-off in the euro and more calls for its dissolution, which would be an economic catastrophe.
The financial press screams for politicians to keep their hands off the markets, yet then turns around and blames them for weak leadership in letting their countries' debts spiral out of control. Against this backdrop, Australian Prime Minister Kevin Rudd and his top advisers stand almost alone as defenders of a plan to tax mining resources at a higher rate, dubbed the "super profits tax." Even as details are still being negotiated with the mining industry, one large mining company has put $15 billion of projects on hold, another is threatening thousands of job cuts and dividend cuts to shareholders, and still others are saying the tax will prevent China from investing in more Australian resources, as if a higher tax rate could stop the Chinese global resource vacuum.
While the announcement of the tax was botched and the reasoning from the government not well defined, it's interesting to see the public reaction to it, as opposed to the reaction in the U.S. to President Obama's earlier calls for a windfall tax against oil companies. While oil companies are generally reviled in the U.S., the energy and mining companies in Australia are regarded as national champions, precious resources to be protected. What's lost is that they are still big businesses making huge profits on materials that rightfully belong to the entire country.
At the domestic level, the controversy will drag on for months, and at present, the jury is out on whether Rudd can survive it to win another term. At the global level, though, it's endemic of the larger malignancy that has gripped big business and markets since they began recovering from the crisis 14 months ago; that the good times are back and government should stay out of the way of the free markets and big business.
Politicians are relentlessly mocked and make easy targets for sharp-tongued financiers, corporate spin doctors, and media pundits. But in times of great crisis, some find the courage to stand up against what everyone else says is a terrible idea and push through a reform or change that saves the day. Europe is in great need of one or two of these leaders now, and Merkel has at least tried to don that mantle. She says Greece won't be Europe's Lehman Brothers. She's right. Greece is Bear Stearns, and will be rescued, perhaps even sold to J.P. Morgan Chase for $10 a share. Spain is Lehman Brothers, big enough to shake the euro zone to its foundation. In this scenario, Italy is AIG, too big to fail and fall out of the euro, and Britain is Goldman Sachs, outside of the euro and believed to be above the fracas, but in reality extremely vulnerable.
Merkel stands alone now, mostly because she knows she must. Markets will certainly push the euro from its present $1.24 to its next crisis level of $1.1747, its original exchange rate, and then on toward parity. In the meantime, global markets will continue to shudder. This crisis will play out in the next four to five weeks, because global markets and economies can't take it for much longer.
Other politicians will have to join Merkel, not just in Europe but in Australia, Asia, and in Washington, where Obama and Treasury Secretary Tim Geithner still take the brunt of the criticism for their role in stemming the first crisis. Governments and politicians must do unpopular things sometimes, and by their very nature these things create uncertainty, which markets hate.
But to give in to market and corporate pressure on unpopular-but-necessary measures, to succumb to market forces, is to accept that we have no control over our individual and national fates. And perhaps more frighteningly, to accept that other more harmful forces do.
David Callaway is editor-in-chief of MarketWatch.
David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A financial journalist for more than 20 years, Callaway has worked for Bloomberg News, the Boston Herald, and assorted television and cable stations as a reporter, columnist and commentator.
The bull market today loses a well-known adviser with a stellar track record.
1:34 p.m. May 19, 2010 | Comments: 38
- doomstar | 2:19 a.m. Today2:19 a.m. May 20, 2010
"Free-market forces hound politicians: The world seems to have forgotten the lessons of the global financial c... http://on.mktw.net/9dKUAR" 2:12 a.m. EDT, May 20, 2010 from dcallaway
"Feeling a lot like Sept. 2008 all of a sudden in the markets out there.....could be a tough week next week. http://bit.ly/XyoOw" 12:24 p.m. EDT, May 14, 2010 from dcallaway
"Great piece on massive cash piles at tech companies. Look for more Sybase-type deals to come this summer. http://bit.ly/c6yjEE" 11:31 a.m. EDT, May 13, 2010 from dcallaway
"In markets tug-of-war, gold holds the key: Europe's currency is struggling, China is in a bear market, and th... http://on.mktw.net/bBEWXj" 12:43 a.m. EDT, May 13, 2010 from dcallaway
"Same old Cisco, under promise and over deliver...and shares down as the market focuses on next quarter's under promise http://bit.ly/aGeEed" 5:11 p.m. EDT, May 12, 2010 from dcallaway
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