Even Blacker Monday?

Despite its severity, the 1987 crash had a relatively mild impact on the real economy. But what abou

On 19 October, 1987 – so-called, ‘Black Monday’ - the world’s stock exchanges suffered very sharp price falls. The worst, since the Great Crash of 1929.

On that one day, the Dow Jones Industrial Average slumped by 23%, and in the few weeks of October and early November, prices on the exchanges in London, Frankfurt, Zurich and Paris all fell by 34-40% (the Nikkei in Tokyo was down 19%). Thus came to an end five years of strong bull market activity.

Anxieties about US deficits, a declining dollar, the threat of rising interest rates in the face of inflationary pressures and growing US-Iranian tensions were the backdrop to growing market jitters, but analysts have still not been able to come up with a convincing explanation for the severity of the security price falls.

In the immediate aftermath of the crash some pointed – again, without any great conviction - to the possible destabilising effects of recent regulatory changes (such as London’s ‘Big Bang’ of 1986, which allowed greater freedom to financial institutions to move into new areas of business) and to institutions’ growing reliance on computer modelling to determine the timing of buying and selling shares.

Technology has moved on since then, but in today’s turbulent markets, real concerns continue to be expressed about the risk assessment quantitative computer models used by the global financial institutions, particularly the hedge funds.

The fear is that while these models may be fine in processing frequent, short-term variations in the markets, they still seem unable to cope with the infrequent, sharp changes that denote crises.

Despite the severity of the 1987 crash, its most notable characteristic was the relatively mild impact it had on the real economy. In the UK, the National Institute for Economic Research estimated that consumption fell by no more than 0.3% in the first twelve months as a result of the collapse in the equity markets.

There may have been a crash on the stock market, but for jobs and growth there was relatively little fallout. Here, the role of the central banks was benign.

Central bankers are the guardians of systemic financial stability and, in this, their lender of last resort (LOLR) function can be critical during a perceived crisis. However, the task calls for careful judgement and - as we have seen in recent events - central banks will be condemned if they do act; and condemned if they do not.

These public servants are responsible not only for the stability of the financial system but also for monetary stability (especially for moderating inflation). They are also anxious to avoid their actions giving rise to ‘moral hazards’.

An example of such a hazard would be if a central bank was widely perceived as bailing out the incompetent management of a bank by providing LOLR loans on unduly lenient terms. It is for such a reason, that normally, neither fraudulent nor insolvent banks are offered LOLR facilities – in the case of Northern Rock in 2007, of course, the bank was solvent but was suffering from a shortage of liquidity because of its over-reliance on interbank markets that were no longer lending freely.

For central banks, it is a tightrope balancing act. In 1987 the central banks, led by the actions of the then newly-appointed Chairman of the Federal Reserve, Alan Greenspan, had been widely praised for limiting the effects of the stock market collapse on the monetary system (and, thus, the real economy) by supplying the banks with liquidity and keeping interest rates down.

In contrast, the same Greenspan was criticised for prolonging the dotcom boom mentality (or ‘irrational exuberance’ in Shiller’s words) of the 1990s when the Fed followed a similarly liberal policy as it tried to neutralise the effects of the collapse of the leading US hedge fund, Long Term Capital Management, in 1998.

In 2007, the Bank of England’s hard stand against ‘moral hazard’ came unstuck when Northern Rock depositors were unconvinced, confidence evaporated and sparked the first run on a significant British bank since 1878 (not 1866 as has been widely but incorrectly reported).

But this was an error of execution, not of principle. The Bank’s LOLR intervention is wholly justified. So far in the current market turbulence, stock market prices have been rebounding after each sharp fall, but the lesson of previous corrections - including 1987 - is that the end of a run of bull years is usually marked by a phase of oscillation (of the type we have had this year), followed by a sharp downturn.

If it should come, let us hope that the impact on growth and jobs is as mild as in 1987.

Michael Collins is a professor of financial history at Leeds University Business School and is an expert on bank-corporate relations and central banking. His current research projects include ‘Bank Provision of SME Finance, 1940-70’ and ‘Institutional Investors and the Development of the British Capital Market, 1900-1960’. His recent publications include Michael Collins & Mae Baker, Commercial Banks and Industrial Finance in England and Wales, 1860-1913.
Ralph Steadman for the New Statesman.
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Tim Farron: Theresa May is "the prisoner of the Ukip wing of her party"

The Liberal Democrat leader on his faith, Blairism and his plan to replace Labour as the opposition. 

This is Tim Farron’s seventh general election. His first was in 1992, when his Tory opponent was a 36-year-old called Ther­esa May. He was just 21 and they were both unsuccessful candidates in the Labour fortress of North-West Durham. He recalls talking “to a bunch of ex-miners who weren’t best pleased to see either of us, some kid Liberal and some Tory”. Now he sees his former and current opponent as “the prisoner of the Ukip wing of her party . . . I think it has rendered Ukip almost pointless – she is Ukip now.”

May was elected to parliament in 1997, but it took Farron until 2005 to join her. She leads the dominant Conservatives while he heads a party of only nine Liberal Democrat MPs. Still, their reversal of fortunes gives him hope. “After the 1992 election, every­one said there’s no way for a non-Tory government, and it turned out there was. So let’s not assume it’s a given there’s a Tory government [for ever].”

In April, I accompanied Farron to Manchester Gorton, in the lead-up to a by-election that was cancelled by May’s decision to call a snap election on 8 June. Still, the 46-year-old’s party has been in campaign mode for months; Lib Dems spoke of using last December’s Richmond Park by-election to test their messaging. It clearly had an effect: the incumbent Conservative, Zac Goldsmith, lost to their candidate, Sarah Olney.

Brexit, to which the Liberal Democrats are vehemently opposed, will be a dominant theme of the election. Their party membership has just exceeded 100,000, close to an all-time high, and they have enjoyed much success in council by-elections, with more to come in the local elections of 4 May.

However, any feel-good factor swiftly evaporated when Farron appeared on Channel 4 News on 18 April. He was asked by the co-presenter Cathy Newman whether or not he believes that homosexuality is a sin, a question that he answered obliquely in 2015 by saying that Christianity started with acknowledging that “we’re all sinners”.

This time, he told Newman, he was “not in the position to make theological announcements over the next six weeks . . . as a Liberal, I’m passionate about equality”.

The Channel 4 interview divided opinion. One Liberal politician told me that Farron’s stance was “completely intolerable”. Stephen Pollard, the influential editor of the Jewish Chronicle, described it as
“a very liberal position: he holds certain personal views but does not wish to legislate around them”. Jennie Rigg, the acting chair of LGBT+ Liberal Democrats, said it was “as plain as the nose on my face that Tim Farron is no homophobe”.

Farron declined the chance to clarify his views with us in a follow-up phone call, but told the BBC on 25 April: “I don’t believe that gay sex is a sin,” adding, “On reflection, it makes sense to actually answer this direct question since it’s become an issue.”

For his critics, Farron’s faith and politics are intertwined. He sees it differently, as he told Christian Today in 2015: “. . . the danger is sometimes that as a Christian in politics you think your job is to impose your morality on other people. It absolutely isn’t.”

Tim Farron joined the then Liberal Party at the age of 16 but didn’t become a Christian until he was 18. Between completing his A-levels in Lancashire and going to Newcastle University to read politics, he read the apologetics, a body of Christian writing that provides reasoned arguments for the gospel story. “I came to the conclusion that it was true,” he told me. “It wasn’t just a feel-good story.”

In speeches, Farron now takes on the mannerisms of a preacher, but he had a largely non-religious upbringing in Preston, Lancashire. “I don’t think I’d been to church once other than Christmas or the odd wedding,” he says. “I went once with my dad when I was 11, for all the good that did me.”

When we meet, it is Theresa May’s religion that is in the spotlight. She has condemned the National Trust for scrubbing the word “Easter” from its Easter egg hunt, a row it later emerged had been largely invented by the right-wing press in response to a press release from a religious-themed chocolate company.

“It’s worth observing there’s no mention of chocolate or bunny rabbits in the Bible,” Farron reminds me. “When people get cross about, in inverted commas, ‘us losing our Christian heritage’ they mean things which are safe and comfortable and nostalgic.” He pauses. “But the Christian message at Easter is shocking, actually, and very radical.”

British politics is tolerant of atheists (such as Ed Miliband and Nick Clegg) alongside those who, like David Cameron, are culturally Christian but whose faith is “a bit like the reception for Magic FM in the Chilterns: it sort of comes and goes”. But the reaction to Farron’s equivocation on homosexuality prompted many to wonder if a politician who talks openly about his faith is now seen as alarming. Nebulous wishes of peace and love at Christmas, yes; sincere discussions of the literal truth of the Resurrection? Hmm.

Tim Farron’s beliefs matter because he has a mission: to replace not only Jeremy Corbyn as leader of the opposition but Theresa May in Downing Street. Over lassis at the MyLahore curry house in Manchester, he tells me that Britain is facing two calamities. “One is Brexit, indeed hard Brexit . . . and the other is a Tory government for 25 years. We have to present a genuine, progressive alternative that can not only replace Labour as an opposition, it can replace the Tories as a government.” This is ambitious talk for a party with nine MPs. “I understand the ridicule that will be thrown at me for saying those things: but if you don’t want to run the country, why are you in politics?” He pauses. “That’s a question I would ask most people leading the Labour Party at present.”

What does he think of May, his one-time opponent in North-West Durham? “She strikes me as being very professional, very straightforward, somebody who is very conservative in every sense of the word, in her thought processes, her politics, in her style.” He recalls her 2002 conference speech in which she warned Tory activists: “Our base is too narrow and so, occasionally, are our sympathies. You know what some people call us: the nasty party.”

“In many ways, she was the trailblazer for Cameron in being a softer-focused Tory,” he says. “It now looks like she’s been trapped by the very people she was berating as the nasty party all those years ago. I like to think that isn’t really her. But that means she isn’t really in control of the Conservative Party.”

Voters, however, seem to disagree. In recent polls, support for the Conservatives has hovered between 40 and 50 per cent. Isn’t a progressive alliance the only way to stop her: Labour, the Liberal Democrats, the Greens, the SNP and Plaid Cymru all working together to beat the Tories?

“Let’s be really blunt,” he says. “Had Jeremy Corbyn stood down for us in Richmond Park [where Labour stood Christian Wolmar], we would not have won. I could have written Zac Goldsmith’s leaflets for you: Corbyn-backed Liberal Democrats.

“I’m a pluralist,” he adds. “But any progressive alliance has got to be at least equal to the sum of its parts. At the moment, it would be less than the sum of its parts. The only way the Tories are losing their majority is us gaining seats in Hazel Grove –” he ticks them off with his fingers, “– in Cheadle, in the West Country and west London. There’s no chance of us gaining those seats if we have a kind of arrangement with the current Labour Party in its current form.”

What about the SNP? “Most sensible people would look at that SNP manifesto and agree with 99 per cent of it,” Farron says. “But it’s that one thing: they want to wreck the country! How can you do a deal with people who want to wreck the country?”

There’s no other alternative, he says. Someone needs to step up and offer “something that can appeal to progressive younger voters, pro-Europeans and, you know, moderate-thinking Middle England”. He wants to champion a market economy, strong public services, action on climate change, internationalism and free trade.

That sounds like Blairism. “I’m a liberal, and I don’t think Blair was a liberal,” he replies. “But I admire Blair because he was somebody who was able to win elections . . . Iraq aside, my criticisms of Blair are what he didn’t do, rather than what he did do.”

Turning around the Tory tide – let alone with just nine MPs, and from third place – is one hell of a job. But Farron takes heart from the Liberal Party in Canada, where Justin Trudeau did just that. “I’m not Trudeau,” he concedes, “He was better-looking, and his dad was prime minister.”

There is a reason for his optimism. “I use the analogy of being in a maze,” he says, “You can’t see a way out of it, for a progressive party to form a majority against the Tories. But in every maze, there is a way out. We just haven’t found it yet.” 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

This article first appeared in the 27 April 2017 issue of the New Statesman, Cool Britannia 20 Years On

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