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Sat

22

Sep

2007

Some disturbance in the markets - George Anthony reviews a week of panic selling
Saturday, 22 September 2007 11:44
by George Anthony

 At particular times a great deal of stupid people have a great deal of stupid money... At intervals... the money of these people — the blind capital, as we call it, of the country — is particularly large and craving it seeks for someone to devour it, and there is a ‘plethora’; it finds someone, and there is ‘speculation’; it is devoured, and there is ‘panic’
— Lombard Street-Walter Bagehot.
I plead guilty in part to the description given by Samuel Brittan in the Financial Times of August 17th “of those lumpen Marxists who greet every financial shock by gloating that the long-predicted final crisis of capitalism has arrived”. He is not so sure about it himself though, because in the same article he wrote, “These fluctuations can, with a bit of luck and good policy, be tamed but not abolished”.

In my recent venture into the Islip Bulletin website feature I have given almost daily news on what the Financial Times has described as “panic”, and quoting one banker, who said, “We are entering one of the greatest banking crises in decades. The credit cycle has turned, bad debts are soaring, banks will go bust and stock markets will fall much further.”

Other quotes convey the same sentiment, for this lumpen Marxist to sit back and enjoy the discomfiture of the captains of industry losing their nerve, money and prestige.

With a Christ College, Cambridge luminary adding gravitas to the events by quoting the “great heterodox economist”, Hyman Minsky, who wrote, “The internal workings of a capitalist economy generate financial relations that are conducive to instability and that the price and asset value relations that will trigger a financial crisis in a fragile financial structure are normal functioning events”.

So there it is, the well paid establishment intellectuals, passing judgement on the nutters who gamble every day with somebody else’s money and hoping to get away with it.

Still, one of the swindlers of the South Sea Bubble paid for St Giles hospital to be built, so they can’t all be bad. Rather like the steel magnate and strikebreaker, Andrew Carnegie, (In 1901, Andrew Carnegie and JP Morgan created US steel, a behemoth that made 30% of the world’s steel. That market share has never been matched.) mostly remembered nowadays for giving his ill-gotten millions away to charity.

 


Some very powerful and greedy individuals have taken a similar path of redemption. Like John D. Rockefeller, the benefactor of the munificent Getty foundation, who began his acquisition of millions in the Texas oil industry. His methods were simple. He would make his rivals an offer and if they refused it, he would blow them up.[1]

These then are of the class presently wriggling on the hook of panic selling, as the bull market comes to an end.

So we are witness to the results of modern free market forces at full stretch, known popularly, or not so popularly, depending on which side of the tracks you live, as globalisation.

But as yours truly pointed in the Islip issues of February 2003 and June 2004, capitalism has been here before, with the Wall Street crash of 1929 and the world impoverishment that followed.

Exacerbated in part, as pointed out, by the American restrictions on trade brought about by the manipulated fear of anarchism and the frenzy of the Palmer raids. You might call it Sacco and Vanzetti’s revenge.

In other words, politics and economics are intertwined; where events get out of control, and the media, adds to the panic.

As an aside, where does that put the American religious right and their pals in the Labour government, who put their trust in the Lord. But at least, that’s where the Salvation Army comes into its own, organising the soup kitchens-as in the Great Depression-for the “undeserving poor”.

Significantly a current target of the trade union movement, notably the GMB; Private Equity Finance, has been one of the causes of the present run on the markets; which with the other causes are listed as follows;

FEBRUARY-Global stock markets saw their first big wobble of the year as evidence of problems in the US subprime mortgage market began to mount.

MAY-UBS announced on May 4 that its adventure with an in-house hedge fund was over.

JUNE-On June 19, it emerged that investment banks that had lent money to two hedge funds run by Bear Stearns Asset Management were on the verge of seizing assets to try to recover the cash.

JULY-Financing for the Alliance Boots and Chrysler buy-outs, two of the biggest equity-backed deals in the markets, ran into serious difficulties on July 25, intensifying fears about the possibility of a credit crunch.

JULY-AUGUST- fears of a widespread credit crunch created high volatility in stock markets and credit markets.

AUGUST-The growing fears about US subprime exposure have spread far beyond US banks and small specialised lenders. Money market funds with exposure to complex securities run by BNP Paribus and others shut their doors to investors wanting their cash back — Financial Times 17/08/2007.

The present Fed chairman is yet to use the so-called “Greenspan put”-where speculators could take risks freely, knowing the Fed would put a floor under their losses if their bets went wrong. The regular’s in Wiliam Hill’s betting shops would appreciate the same treatment.

Summing up the week that ended on August 18th, the Financial Times, listed its six key events.

(1) Countrywide Financial, the biggest US mortgage lender, borrowed the entire $11.5 billion available in bank credit lines after finding itself unable to access short-term financing.

(2) Japan’s benchmark Nikkei share index fell almost 9% this week, as Asian markets fretted over the subprime crisis.

(3) The US Federal Reserve surprised markets on Friday when it cut the primary discount rate, which governs direct loans from the Fed to banks, by 50 basis points.

(4) The yen traded at a one-year high of Y111.62 to the dollar as investors rushed to unwind carry-trades, in which low-yielding currencies like the yen are sold to finance the purchase of riskier, higher yielding assets.

(5) The CBOE Volatility index, also known as Wall Street’s ‘Fear Gauge’, this week rose to 37.50, its highest since October 2002, when the bull market in stocks began.

(6) Copper prices fell almost 7% this week to a five-month low of $6,954 per tonne, on fears that the US housing market will take longer to recover than thought — Financial Times 17/08/2007.

Here from the same stable is one pundits explanation, for the current debacle.

“There has been a systematic deterioration in credit quality as a result of financial innovation. Banks now routinely sell their loans, which are then packaged into all manner of complex products designed to satisfy investors demand for income at a time when yields on virtually all investments have fallen to very low levels. When loans can be rapidly ejected from bank balance sheets in this way, bankers have little incentive to worry about the creditworthiness of borrowers.

“Whether this situation points to a US recession and a consequent problem for the global economy, it is too early to say. But it will take more than interest rate cuts to keep this financial show on the road”

Samuel Brittan’s jaundiced view on the result of a market collapse, won’t happen automatically. It has to convince a majority of the people that capitalism is finished. And by organised struggle, replace it with Socialism. But that’s another story.

Note

1. Goldsborough by Stefan Heym

From the Islip Political Newsletter

 
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