Panic in world markets

Panic in world markets

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.”

Cartoon by Latuff

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.”

Uncle Sam's Favorite Child

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.

Unemployed men march in Toronto, Canada, circa 1930
Unemployed men march in Toronto, Canada, circa 1930.

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.

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

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