Financial links

In a recent opinion piece ("Sharemarket a sideshow" or "Sorry to be so sober, but the world is not ending") the veteran Australian economics commentator Ross Gittins refuses to be worried by the prevailing economic news. He is a rare calm voice. However, one of his items of historical evidence might be seen as more ambiguous on this island:

Do you remember the crash of October 1987? No, probably not. There's no great reason to. It was the biggest fall on Wall Street since the Great Crash of 1929. People were panicking on that day in 1987 much as they are now.

A commentator senior to me predicted on page 1 it would lead to a global depression. In my comment - which was relegated to an inside page - I predicted no worse than a world recession. Fortunately, my thoughts were billed as ''The End Is Not Nigh''.

Turned out we were both way too pessimistic. What transpired? Precisely nothing. Neither in America nor here [  In Australia ]. 

I suggest that the London crash created more lasting memories, and bitter ones on the part of those caught in the negative equity trap. It pricked the bubble of magic that surrounded Margaret Thatcher. The financial struggles of the electorate which followed almost certainly played a large part in her downfall.

We were too closely coupled to the US economy, as we were in 2008 and continue to be. Australia's growing links with the rest of the Pacific region insulated her in 1987 and will do so now. The US was too big to fail in 1987 and again in 2008. (But there are signs that her international creditors are now losing patience.) So the US merely sneezed but we caught the cold.

Spain is an interesting case. Having survived one scare over exposure to dodgy debt, she legislated to protect her banks from themselves - something that the Labour government should have been doing here. The result was that Spain's major financial institutions survived the US CDO failure, and Santander was able to pick up the choice pieces from our own bank crashes. However, the Spanish economy as a whole had become too dependent on property (as in Ireland). I haven't seen the figures, but I would guess that Spain's building boom was largely fuelled by investment from the UK. When we caught our cold, we passed it on to Spain.

With companies reporting increased profits, our economy is clearly on the mend and the stock market fall is puzzling. It is a good time to invest. There are bargains out there, but the first rule must be the age-old one: diversify.