Morning:
9°c
I have been saying in this column for six months that correcting the excesses in the banking sector would probably do serious damage to the wider economy and cause a marked slowdown in growth in 2008. To judge from the tone of the New Year forecasts with which we have been bombarded in recent days, this is now the generally held view. Time, therefore, to move on.
That the economy is going to slow down is not necessarily a cause for gloom. Thinking in advance about a recession and worrying about the possible impact of a slowdown is almost always more harrowing than actually having to cope with it when it arrives. People have to work for their money rather than have it served up on a plate but that is no bad thing, and the opportunities still exist because the bulk of economic activity carries on unscathed.
An economy where output grows from 100 to 103 is booming. An economy that slips from 100 to 99 is in recession. But this gamut of emotion from boom to bust is in effect about whether our pound grows to 103p or slips to 99p. But even if the worst happens, there is still a lot of business activity behind that 99p.
Booms and recessions are much more in the mind than they used to be. They are more about mood and confidence, about how people feel, what people and politicians expect and how the media report things than about actual changes in economic activity.
Normally, hard times are good for well-run businesses. In good times, people make money even when they don't really know what they are doing. In tougher times, they get found out, make mistakes and are mopped up by better-run rivals.
It can get nasty, of course, for some unfortunate individuals and specific sectors, and a fall in house prices would make most of the country feel worse off. There are likely to be some spectacular bankruptcies and horror stories in the buy-to-let sector, where a high price will be paid for some of the excess. But the fear of a house-price fall is worse than the reality for individual homeowners who have no intention of selling and are not forced to do so. They simply have to sit it out. Interest rates are coming down, which should ease some of the strain on those who find the interest payments hard to bear.
In previous recessions, the increase in unemployment was the major threat to house prices because people were forced to sell up when they lost their jobs. Interestingly, some economists say this is less of a threat this time because immigrant labour will take the strain.
Most immigrants only come here for a few years, with those going home replaced by a new influx. But if jobs become scarce, those going home will not be replaced because they will divert to where it is easier to find work. So just as immigrants have been a major source of economic growth, so they may serve as a buffer against the worst effect of recession and give us another reason not to overdo the gloom.
IT is a fact well-known among that section of the great and good called upon to carry out inquiries at the request of government that the bulk of the criticism their reports attract will come from people who have never read the original documents. As London Business School Professor Elroy Dimson observes, much the same could be said of hedge funds, where "more people have a view...than know about them", meaning that many of their harshest critics are people who do not know what they are.
Of course, one reason for the criticism is that hedge funds are secretive, and people react badly to things they do not understand, particularly when they seem to wield considerable power and influence, are only marginally called to account other than to their investors, make the people who run them fabulously wealthy and are either very bad or seriously reluctant to explain in public what exactly they do. It is an atmosphere in which public distrust can only flourish. Hedge funds have only themselves to blame for the public disquiet about their activities.
From this month, however, there is far less excuse for being ignorant, with the arrival in the bookshops of Philip Coggan's Guide to Hedge Funds published by Profile Books. It really is what it says - a quick and easy jargon-free guide to what they are, who they are, what they do and the arguments about whether or not what they do should worry us. If you cannot tell your statistical arbitrage from your managed futures and want to know more about the organisations that apparently account for about half the trading in the stock market, this is the book for you.
It will not silence the critics - that is not its purpose - but it will certainly lead to a much better-informed debate.
