CITY AND SUBURBAN
As between Goldilocks and the three bears, I'm on the side of the bears
CHRISTOPHER FILDES
Boston ladies of a certain age complain about the modern thunderstorm. It does not, so they say, clear the air. James Grant feels like that about the modern stock mar- ket. If it only knows one way to go, which is upwards, it cannot be doing its job. From his office on Wall Street he has watched the world's biggest stock market march up 60 per cent in two years, responding to what it calls the Goldilocks economy — not too much, not too little but just right. As between Goldilocks and the three bears, Mr Grant and I are on the side of the bears. The trouble is, he says, that investors no longer fear them. They think that the sage Alan Greenspan at the Federal Reserve has abolished the economic cycle, or at any rate the bits of it that go down. What Mr Greenspan undoubtedly did was to nurse the American banks back to health on a diet of cheaper money and profitable financial markets. When he now warns that the markets are overdoing it — exaggerat- ing, exuberating, blowing up bubbles they just exaggerate some more. In his provocative new book, The Trouble With Prosperity, Mr Grant argues not just that it will end in tears, but that it should. Capital- ism and the cycle go together. When it turns down the mistakes are cleared out of the system and the foundations can be laid for the next recovery. To pretend that it need not happen only makes the evil day more evil when it arrives. Mr Grant cites the example of Japan, whose disciplined markets stayed upright, ten years ago, when Western markets crashed. Since then Japanese shares have lost more than half their value, with the government still trying to prop them up. He could have cited France, pouring fortunes into banks which in all but name have been bust for some time. Capitalism punishes investment in failure. Some Americans, so Mr Grant thinks, are investing in it now, because they have forgotten the risks or never learned them. Time to clear the air.
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