The question I am often asked these days is whether or not today's recession is as bad as 1974. To my mind it is much worse. In 1974, the secondary banks failed; today, leading banks of the calibre of Lehman and Bear Sterns have already failed and the world's banking system is still in grave danger. In 1974, interest rates in the UK were as high as 12 per cent, so there was plenty of scope for dramatic easing. At the start of this recession our interest rates were about 6 per cent, with much less leeway for impressive reduction.
Today, investment is truly global with essential information transmitted instantly to all parts of the world. All of the world's economies are intertwined. We have learned that de-coupling from the American setback was never really a possibility. The domino effect has never been more prevalent.
The financial crisis in America and the UK stems from the substantial drop in house prices fostered by ridiculous over-leveraging. The problem with falling house prices is not only the loss of a person's wealth but the removal of the feel-good factor which has, during the prolonged period of rising prices, encouraged consumers to borrow more and to spend more. And then there's the impact, yet to be fully felt, of rising unemployment.
One important plus today is that the powers-that-be seem to be working broadly in concert and are now pulling out all the stops. Whether this is enough to prevent a full-scale depression is, as yet, unclear. What is clear is that any investment portfolio constructed in such times has to be predominantly defensive - but with some aggressive elements to capitalise on any recovery.
