Panic
has gripped the stock markets of the world. Things are completely out
of control, and there is nothing that governments can say or do that
can stop it. As in 1929, every time people thought that the worst had
come, further falls were just round the corner. Nobody knows how far
share prices have still to go. The world economy now finds itself in
unsheltered waters. "We’re way beyond fundamentals," said
Chris Orndorff, head of equity strategy at Payden & Rygel, in Los
Angeles. "This is just pure panic, that’s all it is."
Nobody
has the slightest idea of where all this is going or how it will end.
But all the lights are flashing red. Today on the London stock
markets all shares were sharply down, even shares like
pharmaceuticals, which might be considered safe. Yesterday in the
U.S., the Dow Jones Industrial Average fell below 9,000 for the first
time since 2003. There were similar falls across Europe – Paris was
down 8.4% while Germany was down 9.1%. Trading in the Vienna market
was suspended until Friday afternoon. The smug Russian bourgeois who
imagined they would not be affected by the world crisis have had a
rude surprise with the sudden fall in oil prices. In Moscow the stock
market remains suspended because of excessive volatility.
US
stocks are on track for their worst year since 1937. "I’ve never
seen a panic like this," said David Wyss, chief economist at
Standard & Poor’s. "I’ve seen stock market drops, but not an
overall panic." Today’s Washington
Post writes: "Fear and foreboding
took hold Thursday on Wall Street, as the market again plunged and
investors became convinced that the nation is on the verge of a deep
and prolonged recession." The huge $700 billion package that was
intended to get inter-bank lending moving again has signally failed
in its objective. The three-month rate at which banks lend dollars to
each other (known as Libor) has risen to 4.8%.
Heavy
falls were seen across Asia’s markets as a climate of fear took hold.
In Tokyo share prices tumbled more than 10 per cent and trading of
some shares and options was suspended. Share prices were heading for
the lowest since June 2003. The
Bank of Japan reacted by injecting a total of ¥4.5 trillion
($66.6 billion) into money markets. Australian
shares headed for their worst week since the 1987 stock market crash.
South Korea’s Kospi index fell to its lowest since June 23, 2006,
while a plunge in futures triggered a halt in programme trading.
This
was the eighteenth consecutive business day that the Japanese central
bank has poured money into the markets to try to ensure a flow of
cash vital to the financial system. But it has had no effect. Tokyo’s
shares plunged 24% during the week, double their weekly fall during
the 1987 market crash. "Selling is unstoppable in New York and
Tokyo," said Yutaka Miura, senior strategist at Shinko
Securities in Tokyo. "Investors were gripped by fear."
Elsewhere
in Asia was a similar story. Hong Kong’s benchmark Hang Seng index
slumped to a three-year low while in the Philippines share prices
closed down more 8.3%. In Indonesia, plans to re-open the stock
market were suspended in order to prevent what the president of the
exchange called "deeper panic". Trading was halted for two
days earlier this week.
In
India, the Mumbai market plunged 6.5% in early trading. Shortly
afterwards, India’s central bank said it would make an additional
$12.8bn (£7.5bn) available for the money markets. Australian
shares closed down 8.3%. Let us recall that not long ago, Asia was
supposed to be the magical factor that would prevent a global
recession. And there were even some simple souls who believed it.
Britain
in crisis
Tony McNulty, a minister
in Gordon Brown’s government, yesterday became the first minister
to acknowledge that Britain was heading for recession. He said the
success of the giant handout to Britain’s banks "will be the
precursor [sic.] to how deep and how long the recession will be".
He added: "We’re slowly getting to a stage where the slowdown
may well turn technically into recession and then we’ll be talking
about the nature and depth of the recession."
These pessimistic comments
are in stark contrast to the previous assertions (no longer heard)
that the British government’s bank bailout would help solve the
credit crunch. Overnight this bold assertion was changed. Instead of
"solving the credit crunch", its purpose was said to be "to
avoid the collapse of the banking system."
In
total, Brown and Darling have put about £500 billion at the
disposal of the bankers. Most of this is in the form of loans and
other guarantees, which they say will be returned (although when
precisely they do not say). There remains the sum of £50
billion, which they hope will
be returned but have no idea either how or when. Hope, of course, is
a wonderful thing. Every gambler hopes
that his next throw of the dice will make him rich. And this
particular hope has just as little foundation.
What is
truly amazing is how these gentlemen talk about staggering sums of
money as if they were so much small change.
£50 billion is a huge sum. It is
five times the expected cost of the 2012 Olympics and a third of all
the money received through income tax in Britain last year. It’s also
60% more than government has borrowed in total in the last tax year.
This sum is far too large to come from taxes, so it will be borrowed.
This increases the already high level of indebtedness of the British
economy. It will impose a heavy burden on the taxpayer and impose
severe restrictions on public spending for the foreseeable future.
Gordon
Brown claimed that it is an investment that should eventually more
than pay for itself. The argument is that this was done in
Scandinavia. But while it is true that Norway got the money back,
Sweden and Finland made losses. Like any investment, this is a
gamble, and its success or failure depends entirely on whether the
banks recover. But there is no sign of this. On the other hand, this
measure has not had the effect of restoring confidence to financial
markets. The same day it was announced the FTSE experienced a fall of
five points and has continued to fall since.
This
confirms the comments made in the House of Commons by Colin Burgon,
the Labour MP for Elmet. "What I
see is the invisible hand of the market putting its hand into the
pocket of the taxpayer and taking £50bn away and maybe putting
two fingers up as well." The
measures amount to a partial nationalization. Yet there is nobody on
the boards of the "nationalized" banks to represent the interests
of the taxpayers, and therefore no real control over the bankers.
In
the House of Commons, the Conservatives and Liberals backed the
government’s plan. Naturally! In a crisis, all good men and women
must rally to the Cause, that is to say, the Cause of Capital. The
leaders of all the parties fell over themselves in showing their
loyalty to the City of London. But the Conservative leader David
Cameron could not resist scoring a point over his New Labour rival.
With
the kind of polished cynicism that only comes from years of assiduous
practice, he demanded that no bonuses be paid to the bankers this
year. This request, which was intended for the broadest audience,
caught poor Gordon off guard (this is not difficult to do).
In
a display of parliamentary ineptitude that was startling even by his
own standards, the Prime Minister mumbled something about the need to
"reward competence" or words to that effect. At a moment when
everybody knows that these "competent" bankers have just wrecked
the entire world financial system, such comments from the Labour
leader will not have won him many new admirers either inside or
outside the Mother of Parliaments.
It
is true that the very next day, our Gordon (doubtless prompted by his
advisers) decided to make public statements to the effect that
"irresponsible" bankers would have to be "punished", although
how exactly this "punishment" would be effected remains unclear.
Perhaps they would be obliged to listen to one of Alistair Darling’s
lectures on financial probity for a whole weekend. They would
probably prefer to do without their annual bonus.
Iceland
– a nation bankrupted
While
the dramatic falls on the world’s stock markets were the most
visible sign of the deepening crisis, a more significant one was the
rise in interest rates for short-term lending among banks. This came
despite Wednesday’s cut in the target interest rate of the world’s
major central banks. It shows that the banks are more fearful than
ever of lending to each other. The choking off of credit spells
disaster not only for the financial system but also for productive
industry, consumers – and even whole nations.
Today’s
Washington Post pointed to the harm that has already been inflicted
on US manufacturing industry: "Some of the worst damage was among
U.S. automakers. J.D. Power and Associates said that the global auto
industry may experience an "outright collapse" in 2009.
Then the S&P Ratings Agency put GM debt on a credit watch. GM
stock fell 31 percent to $4.76, its lowest since 1950, and Ford stock
was down 22 percent." This means that big firms will be made
bankrupt in the near future, with a consequent increase in
unemployment, which will signify a further contraction of the market,
ending in further bankruptcies.
The
article continues: "Meanwhile, darker clouds have moved to new
parts of the economy. Trouble in sectors like steel production and
heavy machinery, which until recently were growing strongly, has
contributed to the mounting view that the U.S. economy has tumbled
into a significant recession. Economists predict that the economy
will contract until the middle of 2009."
Even
the steep fall in oil prices was bad news for the stock market, as
energy shares fell. Exxon Mobil and Chevron each fell 12 percent.
US consumers have cut back sharply on
spending, in what will be the first quarterly decline in 17 years
when the government publishes its figures for the third quarter. This
is the most decisive question. The US market used to absorb a vast
amount of commodities produced in other countries. A sharp reduction
in demand in the USA means that these goods cannot be sold.
Now all the chatter of the bourgeois
economists about the "decoupling" of the US economy from the rest
of the world stands exposed for the nonsense it was. Like a heavy
rock thrown into a lake, the crisis is making waves. The financial
Tsunami that started eighteen months ago in the USA has now hit
Iceland, where the Internet bank Icesave has announced it will freeze
all of its customers’ accounts, meaning that anyone with money in
the bank will have to apply for compensation in order to get their
money back. Icesave’s parent bank, Landsbanki was nationalised by the
Icelandic regulatory authorities.
Attempts to obtain money from the
authorities in Reykjavik have failed for the simple reason that
Iceland itself is bankrupt. Iceland followed the example of Britain
and the USA in the last period and its economy is therefore heavily
reliant on the financial services industry and financial products. As
a result, it had greater exposure to crisis in the subprime market.
This has led to the ruin of a whole nation.
The insolvency affects an estimated
350,000 savers in the UK and Netherlands, with about £4.5
billion of deposits. Local authorities and other public institutions
in Britain have lost a further one billion. Since the British
government has failed to extract assurances from Reykjavik that
Iceland will pay up (it is always difficult to squeeze blood form a
stone), it has taken the unprecedented step of freezing Icelandic
assets in the UK, using anti-terrorist laws to justify its action.
This has led to a diplomatic incident between Reykjavik and London.
These are clear symptoms of
desperation. That is hardly surprising. When the British government
threw £500 billion at the banks, it took a really desperate
gamble. It has now used up all its reserves and plunged the nation
more deeply into the red. The British economy is therefore even more
exposed to the effects of the international crisis than it was
before. Nick Louth writes in MSN Money (8/10/08): "However, for all
of us the biggest risk is now for the broader economy. By pulling the
debt-swollen banks into a national lifeboat, the economy is running
much lower in the water, and is much more vulnerable to recessionary
waves."
Whereas being part of the euro-area
protects countries like Ireland, similarly afflicted with banking
weakness and falling house prices, sterling is extremely vulnerable.
By borrowing an extra £50 billion, much of it from abroad, the
British government has further undermined confidence in the value of
the currency. Sterling has already fallen against both the dollar and
the euro. The pound will fall even further, reflecting the weakness
of the British economy, which is already in recession. Many small
firms are faced with bankruptcy as a result of the credit squeeze.
And the bigger ones will soon follow. Unemployment is now set to
rise.
Capitalist anarchy
The
bourgeois economists express their utter perplexity. Robert Solow,
who won a Nobel Prize in 1987 for his work on economic growth, told
The Washington Post
that the "potential for instability was always there" but
he is surprised at the magnitude of the problems. "I’m as
puzzled as anyone else," he said. "I don’t have any
particular wisdom to sell." These words adequately express the
current psychology of the bourgeoisie and its ideologists, who are,
to use Trotsky’s expression "tobogganing towards disaster with
their eyes closed."
In a desperate effort to stave off the
threatening catastrophe, the global economic policymakers are
gathering in Washington today for the International Monetary Fund and
World Bank annual meetings, and will try to find coordinated
responses. But all the measures that have been taken are in vain. The
markets continue their relentless downward movement. Even as the
British Chancellor, Alistair Darling, and other finance ministers
from the G7 group of leading countries, arrived in Washington to
discuss plans to restore "confidence", as we have seen, the Dow
Jones index of leading shares had already fallen below 9,000 points
for the first time since 2003.
The declared aim of the
British Government at this summit was to push other countries towards
a "comprehensive approach" to resolving the financial crisis and
a renewed effort at strengthening international economic
co-ordination. But in the first place, when an army is routed on the
battlefield, and the cry goes up: "sauve qui peut!" ("Every man
for himself!") it is futile to attempt to restore a sense of
collective discipline and esprit de corps. In the second place, the
British government is not in a position to push anyone into doing
anything these days. In fact, it is having enough trouble pushing
little Iceland into reimbursing several billions of pounds of lost
deposits.
The US Treasury Secretary,
Henry "Hank" Paulson is believed to be trying to expand the
meeting to the G20, adding to the G7 advanced economies those of
Russia, China, India and other rapidly growing countries, on the old
principle that "misery likes company". Together they account for
the vast majority of the world’s GDP. And Mr. Paulson hopes that they
will all be prepared to share in the common pain, principally to help
the USA out of its misery.
The G7 summit comes at the
end of a tumultuous week with markets falling all around the globe.
What we see here is fear. The panic that has swept markets threatens
to overwhelm all attempts by governments to contain the crisis. None
of the desperate measures taken by the Fed and the British and
European governments and central banks have succeeded in halting the
stampede. A very old law, the herd instinct, governs the conduct of
the markets. The faintest scent of a lion prowling in the bush will
send a herd of wildebeest into a panic that nothing will halt. This
is the kind of mechanism that determines the destinies of millions of
people. This is the crude reality of market economics.
President
Bush is scheduled to make a statement about the crisis today in the
Rose Garden. He also will take the unusual step of meeting with
finance ministers from the Group of Seven industrialized countries on
Saturday. Press
secretary Dana Perino said Bush would "assure the American
people that they should be confident that economic officials are
aggressively taking every action to stabilize our financial system."
The assumption, as always with the bourgeois, is that the crisis is
caused by a lack of confidence. But "confidence" reflects the
objective economic conditions. No comforting speeches by Presidents,
Central Bankers or the Pope of Rome will make the slightest
difference.
Class struggle on the
order of the day
Just as the wildebeest can
scent a lion, the markets can scent the imminence of a recession.
Once this happens, nothing can stop it. All the speeches, all the
interest rate cuts, and all the handouts to the banks, will have no
effect on the financial markets. They will see that the governments
and central banks are afraid, and they will draw the necessary
conclusions. Yesterday, there were strong hints from the US Treasury
that it is ready to partially nationalize some of America’s leading
banks. This extraordinary gesture, which flies in the face of all the
precepts of "free market economics", was intended to calm nerves.
Naturally, it failed to do so.
The problem is that what
started as a bank crisis is now affecting the real economy. The
managing director of the IMF, Dominique Strauss-Kahn, said yesterday
that "we are on the cusp of a global recession", and
pledged an emergency programme of funds for countries experiencing
difficulties. However, he refused to name any prospective recipients
of IMF aid, while the most obvious contender among the rich nations,
Iceland, has said it is not seeking such funds. In any case, the IMF
cannot possibly underwrite the whole world. And the crisis, which is
now staring us in the face, is worldwide. No country can escape.
| Unemployed men march in Toronto, Canada, circa 1930 |
The crisis will
undoubtedly hit the poor countries of Africa, the Middle East, Asia
and Latin America hardest. In addition to the collapse of exports,
which will hit all commodities (except gold and silver), including
oil, they face the rising cost of food, which is largely a result of
speculation. A recent report of the Banco Interamericano warned that
the rising cost of food will push 26 million people in Latin America
into absolute poverty.
Robert Zoellick, the president of the
World Bank, warned that the world’s poorest face the "triple
jeopardy" of food, fuel and finance: "The poorest cannot be
asked to pay the highest price. We estimate that 44 million
additional people will suffer from malnutrition this year as a result
of high food prices. We cannot let a financial crisis become a human
crisis." These are fine words, but as the old English proverb
goes, fine words butter no parsnips.
Even in the boom the overwhelming
majority derived little or no benefit. There has been an extreme
polarization between rich and poor in all countries. Two percent of
the population of the globe now has more than half the world’s
wealth. 1.2 billion men, women and children live in conditions of
absolute poverty. Eight million die of poverty every year. This was
the best that capitalism had to offer. What will happen now?
Everywhere the mood of the masses is
changing. In Latin America there is a revolutionary ferment, which
will intensify and spread to other continents. In Britain, the USA
and other industrialized nations many people who previously did not
question the existing social order are now asking questions. Ideas
that previously were listened to by small numbers will find an echo
among a far broader public. The ground is being prepared for an
unprecedented upsurge of the class struggle on a world scale.
London, October 10, 2008
See also:
- Millions of US families threatened with eviction by Jorge Martin (October 10, 2008)
- Neoliberalism – dead or only sleeping? by Mick Brooks (October 9, 2008)
- "Wall Street Socialism" and the US elections by US Socialist Appeal (October 8, 2008)
- Britain: £50bn (or £500bn?) plan to save banks – will it work? by Mick Brooks (October 8, 2008)
- Markets routed in global sell-off by Rob Sewell (October 7, 2008)
- Ireland: housing crash, credit crunch, poses need to nationalise banks by P. Bowman (October 6, 2008)
- World capitalism in crisis by Alan Woods (September 26, 2008)
