Zero Hedge’s latest burst of market hysteria cites a very negative global outlook from The United Nations Conference on Trade and Development (UNCTAD).
While the piece is filled with negative soundbites for Zero Hedge to highlight in bold, we would like to rather emphasise the real point of the report in question.
UNCTAD: In analysing the causes of the crisis, the Trade and Development Report 2009 focuses on the role of excessive risk-taking made possible by financial deregulation and innovation in obscure financial instruments. It highlights the problem of the predominance of financial markets over the fundamentals of the real economy. The experience with this crisis proves that free financial markets do not lead to optimal social and macroeconomic outcomes, and suggests that the relationship between the State and market forces needs to be fundamentally reviewed.
What’s interesting about this UNCTAD report is that it repeatedly emphasises the need for stronger regulation at both the national and international level as a result of market failure.
Yet such a conclusion would be far harder to support if the global outlook wasn’t as bad as they make it out to be. If in five years the world economy was larger than today and growing, then the argument that “free markets have failed” would be much harder to make. If it ain’t broke don’t fix it. So as a global repairman, you have to argue that things are broken.
The report casually glosses over any discussion of positive economic signs, brushing any optimism away as “speculation” without regard to fundamentals while at the same time contradicting itself by admitting market prices have rebounded from “abnormally low levels”.
Given the weakness in macroeconomic fundamentals, an upturn in financial indicators in the first half of 2009 is more likely to signal a temporary rebound from abnormally low levels of prices of financial assets and commodities following a downward overshooting that was as irrational as the previously bullish exuberance. They are not a reflection of strengthened macroeconomic fundamentals but of a restored “risk appetite” among financial agents. Consequently, they could be reversed at short notice, depending on the pace of recovery and financial market sentiment.
As is frequently the case with global warming, we thus suspect a bit of alarmism in the UNCTAD piece, in order not to waste a good crisis. It might not be intentional, it could simply be the effect of constantly viewing the world through the lens of a regulator.
Readers can review the full piece and make their own judgement, linked below. At every turn, you’ll find recommendations for more stringent regulation as the solution to impending disaster.
Given that Zero Hedge loves to lambast the stupidity of regulators, perhaps they should rethink their glowing praise for UNCTAD’s latest scare piece. They’d unfortunately have a lot more regulators to hate if UNCTAD had its way.