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Saturday, August 11, 2007

Markets and politics

Images of City traders looking pensively at screens of red numbers and downward sloping charts have once again topped the news. For those working in the financial sector, it has been an 'interesting' few days. I have noticed the dramatic tension when talking to City friends over the past few days. A level head is required in such circumstances.

The news that equity markets have fallen significantly this week has prompted speculation about the implications for the global economy and for people here in the UK. The latest news is that the International Monetary Fund (IMF) has intervened with a statement that it retains confidence in the financial system. What should politicians say and do about it?

The global economic implications are uncertain. Following the sub-prime (high risk) mortgage problems in the United States, market participants are re-evaluating the risk of holding various types of financial security. This is causing some turbulence. At such times, there can be a temptation for government to intervene but it is often right to simply be calm and not rush to comment or judgement. So far, the issue appears relatively contained within financial markets with, as the IMF maintains, forecasts for global economic growth looking pretty robust and optimistic.

Beyond immediate reaction, there is a key role for government. That is to work to keep the conditions for long term economic stability. If markets were uncertain about the direction of government economic policy in a country, there could be serious economic implications. That's why I have always been impressed with Labour's record on the economy.

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