By Judy Cox
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Market chaos and what it means

This article is over 19 years, 10 months old
\"DON'T PANIC, don't panic!\" say George W Bush and Tony Blair, like the Corporal Joneses of a Dad's Army standing guard over the world's stockmarkets. They try to reassure people that, despite weeks of chaos on the stockmarkets, their economies are fundamentally sound. This was exactly what US president Herbert Hoover said in October 1929, days before the Wall Street Crash plunged the world into a decade of misery and conflict.
Issue 1811

‘DON’T PANIC, don’t panic!’ say George W Bush and Tony Blair, like the Corporal Joneses of a Dad’s Army standing guard over the world’s stockmarkets. They try to reassure people that, despite weeks of chaos on the stockmarkets, their economies are fundamentally sound. This was exactly what US president Herbert Hoover said in October 1929, days before the Wall Street Crash plunged the world into a decade of misery and conflict.

In recent weeks the world’s stockmarkets have seen catastrophic falls followed by wild recoveries. No one dares speculate when or where the chaos will stop. Bush and Blair want us to believe that the arrest of a few chief executives and new laws on accounting ‘transparency’ will resolve any problems. New regulations are unlikely to halt corporate scandals. And they will not solve the fundamental problem behind the market turmoil. This is the growing realisation that the profit rates of US capitalism are not as high as has been claimed.

The corporate chickens are coming home to roost. THE UPS and downs of the financial markets are reported daily, even hourly, on the news. Yet their workings remain incomprehensible to most people. These markets can seem independent of the real economy where goods are made and sold, and profits reinvested.

But the stockmarkets are linked to the real economy and affect it in turn. The basis of profit under capitalism is the exploitation of workers. Some profit goes to the consumption of bosses, the rich and their hangers-on. Some is also used by firms on immediate spending, perhaps buying new equipment to better compete with rivals. The rest is what underpins the financial system.

A firm may have had to borrow money to produce and so make profit. The bankers want their money back, with interest added of course. The portion of profit that goes into the financial system fuels the gambling at the heart of the stockmarkets. However dressed up it is in fancy financial language, what goes on in ‘the markets’ is gambling little different from what goes on in any bookmakers. The only real difference is that the sums involved are much, much bigger. When people buy and sell shares in a company they are gambling on getting a future share of any profits that company may make.

That gambling creates a logic of its own, as the bets spiral further away from any connection with the real economy. A huge apparatus of specialist institutions, like investment banks and fund managers, has grown up dedicated purely to speculation. Traders bet trillions of dollars on things like the future prices of shares, future commodity prices or the shifting values of currencies against each other. Amid the gambling the market traders behave like a herd of swine when they sniff a chance to make profit. Money pours into markets and prices soar as traders rush to get a piece of the action.

Eventually, though, the stockmarkets can become like a huge upside-down pyramid, balanced ever more precariously. The gap between the goings-on in the financial markets and the real economy which is the basis of profit gets ever larger. Suddenly it can all come crashing down or go into wild swings. At the heart of the chaos on the financial markets today is panic about the real state of the US economy.

The lies firms have told about profits are causing fear that hopes of ever-rising share prices on the back of a booming economy will be dashed.

THE US stockmarket boom meant people with shares-a bigger proportion of the population than in Britain-felt wealthy. They were confident to run up debts to fuel consumer spending, which helped fuel the boom further. The result is that the US is one of the biggest debtor nations on earth. But even with debt-fuelled consumer spending and increasing levels of exploitation of workers, the reality of the US economy was not so great. While the stockmarket bubble inflated, the real economy struggled just to get back to where it had been in the 1970s.

The imbalance between the stockmarkets and the health of the real economy has long been obvious to many at the heart of the system. But they are trapped by the logic of the system itself. Alan Greenspan, chair of the Federal Reserve US central bank, warned in 1987 about the markets’ ‘irrational exuberance’.

That didn’t stop him lowering interest rates to make borrowing cheaper. This helped protect the US economy from the 1997 crash which hit ‘Asian Tiger’ economies such as Thailand, South Korea and Indonesia. But the stockmarkets cannot expand forever, because they are not really independent of the real economy.

THE FINANCIAL markets exaggerate any boom in capitalism. But when capitalism goes into recession the markets sharpen the crisis. When the economy is expanding, more and more raw materials are used to produce more and more goods that are sold to apparently ever-eager consumers.

Because capitalism is unplanned, eventually the raw materials, and the machinery and labour needed to transform them, begin to run short of supply. They begin to cost more than anyone planned for, squeezing the profits of firms that need these things. The high prices paid for a particular commodity, like microchips or office buildings, entice more capitalists to produce it.

Too many capitalists pile in, and a crisis of overproduction develops. Goods go unsold, and companies which cannot sell all they hoped to see profits slump. They can go bust and throw workers onto the dole. Those firms, and the workers who lose their jobs, can no longer afford to buy goods, which hits other firms and workers.

Suddenly wider layers of people become nervous that hard times are ahead, and spend less. Official figures released last week show this is exactly what is happening in Britain, as the high street spending bonanza the papers have talked of in recent years grinds to a halt.

With the smell of recession and crisis in the air, trivial things can then be enough to burst the stockmarket bubble. Traders worry that some of their bets could go wrong. They rush to sell stocks and shares to get out before things get worse.

That can see share prices plummet, and then loans taken out by firms on the expectation of rising share prices can’t be repaid. This leads to a ‘credit crunch’. Even healthy companies find sources of credit dry up, and are pushed to the wall. What the financial papers describe as ‘contagion’ sets in, as panic sweeps the financial system.

THE VERY institutions that helped generalise the boom now spread the panic. The aspects of capitalist globalisation trumpeted by its advocates-like the fast movement of capital across national borders-now spread the crash across the world.

Stockmarket crashes stem from, rather than cause, economic crises, but when in full swing they then deepen the problems in the real economy. Governments champion the ‘free’ market. But when a slump hits they intervene-bailing out banks and propping up companies. In 1998 the US government spent millions bailing out the shady Long Term Capital Management fund.

But governments’ room for manoeuvre is limited. Bailouts require huge amounts of public spending. And one problem solved is often a problem stored up for the future. One certain thing is that stockmarket crashes have a huge impact on ordinary people, as those at the top try to make us pay the price for the chaos.

Few of the people who now find that their fate is in the hands of the speculators bought into the Thatcherite fantasy of a ‘share owning democracy’. They simply joined occupational pension schemes or took out endowment mortgages. Now many of those people face being hammered by the market chaos. And while stockbrokers may mourn the loss of their new Porsches, some 14 million people in Africa face starvation.

Slumps and crashes mean the veil is torn off the obscenity of a system no one can control. Yet politicians still insist that we must rely on this market to meet more and more of our needs. Market madness is a powerful argument for socialism and a democratically planned economy.

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