Worldly Wise: Policymakers and politicians call shots

Have you noticed how the needle of that market compass you inherited swings randomly from North to South and back again, no matter how often you recalibrate?

We're not in Kansas anymore, Toto, no matter how hard the equity market clicks its ruby-slippered heels together. The new normal is anything but; it's old — three years old, to be precise — and it's downright weird.

"Nothing we are seeing in a post-bubble credit collapse is normal," according to David Rosenberg, the chief economist at Gluskin Sheff & Associates in Toronto. He is one of the few soothsayers who correctly divined the credit crunch while it was happening, in his previous job at Merrill Lynch.

On August 9, 2007, petrifying money markets spooked the European Central Bank into handing 95 billion euros ($125 billion) to the banking industry. That turned out to be just the first instalment of a global blank check to stuff the holes in finance with taxpayer money via government intervention.

If you believe the equity market, that cash is delivering economic salvation, with the Standard & Poor's 500 Index recouping losses to rest little changed for the year. Look at the bond market, however, and record low yields on two-year Treasuries and 10-year German bunds suggest the future looks a lot more like a zero-growth world slip-sliding into deflation and the dreaded double-dip recession. Whatever is going on in the world of finance, it isn't capitalism or a free market.

Paul Brodsky and Lee Quaintance of QB Asset Management in New York reckon markets are now at the whim of "the vagaries of the subjective central bank decision- making apparatus as a capricious pursuit posing as systematic."

The defining feature of tyranny, they argued in a research report this week that channelled the author Christopher Hitchens, is the unpredictability of its rules ­— a valid description of the current market environment.

"The path of global markets will be determined by policymakers and politicians, not by natural economic incentives or even by policymakers resetting our ‘animal spirits,'" they wrote.

Tim Price, the director of investments at PFP Group in London, says the credit crisis has destroyed "the boundaries of possibility." Faith in credit ratings, government debt, economic Darwinism, regulation, and the enlightened self-interest of banks and bankers has vanished. As a result, "literally anything is possible," he says.

A feature of the credit crisis was how tiny alarm bells started jingling everywhere in the prior months, just softly enough to feel like they could be safely ignored. Listen hard today, and an entirely different suite of scary sirens is discernible through the noise of optimistic company earnings reports.

The US government bullied BP into cancelling its dividend for the first three quarters of this year and cajoled it into setting up a $20 billion fund to compensate victims of the Gulf of Mexico oil spill. That's stealing from the company's shareholders; President Barack Obama has no jurisdiction over BP's treasury, no matter what your moral stance is on seabirds.

Moreover, it looks like the US plans to tweak the rules governing Fannie Mae and Freddie Mac to enhance the pace of mortgage forgiveness. In other words, it will force the now government-controlled agencies to let debtors keep their houses without making all of their debt payments.

That's stealing from Fannie and Freddie's bondholders, whatever you think about the behaviour of mortgage lenders in the go-go years. Ireland is also planning rule changes to make it harder for mortgage companies to foreclose on defaulters, according to the Irish Independent newspaper. And in the UK, the government is pushing commercial banks, many of which it controls as a result of various bailouts, to boost their lending.