30.10.1997

Markets in turmoil

After Brown Monday panic set in, as London share dealers were hit by the worldwide slump

It was a very bad week for the Labour Party last week. We had the pathetic debacle of ‘Brown Monday’, as it has been dubbed. Gordon Brown’s department issued a whole series of confusing statements and deliberate leaks to the press - all of which amounted to a definite ‘maybe’ on joining the European Monetary Union on the first wave in January 1999. Predictably, this threw the financial markets into a state of uncertainty.

While all this was confusion and chaos was going on around him, Brown strolled down to the City in order to launch the new “order-driven” trading system outside the Stock Exchange tower. On October 20 at 8.30am precisely Gordon Brown, in front of the entire world’s media, proudly pressed the button which would initiate the new trading sequence - only to watch the FTSE 100 Index drop like a stone. At one stage the index had slumped by 120 points, wiping more than £20 billion off the value of the largest 100 stocks.

The markets for the last week have continued to be volatile, if not frenetic - or as The Guardian put it, they have continued to “overreact downwards” (editorial, October 29). The recent outburst of anarchy and speculative frenzy was triggered by the current instability in the Hong Kong markets. Panic selling on Tuesday wiped a further 14% off share prices. The Hong Kong collapse was the inevitable result of the massive property speculation that characterises this market. The Hong Kong dollar was over-valued, interests rates too high - and Thailand’s recent baht crisis added to the lethal cocktail. With land being the most fundamental resource - over 40% of capital on the Hong Kong stock market was invested in property speculation - it was inevitable that property prices rose to unsustainable levels and then ‘imploded’, bringing the rest of the market down.

This led to the domino effect, with everybody getting hit by the financial shrapnel to some degree or another. In the now truly global capitalist system, if one part of the chain gets a cold we can all, potentially, get the flu - if not pneumonia.

At the end of last week, some of the prophets of doom were predicting a world financial meltdown. This did not happen. But we should not be casual or blasé about recent events either - it was not just business as usual: much more than a capitalist hiccup.  Any such ‘China Syndrome’ under today’s conditions would dwarf the Wall Street Crash of 1929 - and could shake the entire world to its foundations.  

We have seen some of the symptoms. On Monday this week some £65 billion had been wiped off the stock exchange. Dealers were slumped forlornly across their terminals, watching the FTSE 100 Index fall 457 points - a drop of almost 10% and the most severe market shake-out since the 1987 crash. In New York trading on Wall Street had to be suspended - an unprecedented move taken to forestall collapse.

However, after a sudden surge of buying, causing a leap in the Dow Jones Index (New York) on Tuesday morning, the FTSE began an afternoon recovery which trimmed its losses to 85.3 points at 4755.4. But despite this ‘recovery’, the FTSE has still fallen by 500 points since the beginning of last week - as uncertainty over Britain’s membership of Emu grew and undermined share prices.             

Ironically perhaps, the Dow Jones Index, after a 550-point slump on Monday night, actually ended up registering its biggest one-day absolute gain. In a “blind orgy” of speculation, it surged 337 points to 7498 as a record 1.2 billion shares changed hands. Interestingly, it was the computer giant IBM which spearheaded the American ‘attack’. It decided to spend $3.5 billion buying back its shares - a move which helped underpin Wall Street’s rally. This points to the sheer power wielded by some transnational companies.

Underneath the fighting talk, there are real problems brewing for the world capitalist economy. Nick Knight of Nomura, referring to Hong Kong, stated:

“In a market so dependent on confidence because of its dependence on property, something very definitely has happened, and saying it hasn’t won’t turn the clocks back.”

And that “something” affected every market in the capitalist world, from the most advanced capitalist country to the newcomers. In Moscow the opening of the stock exchange was delayed for six hours, but that could not prevent a huge slump. In Frankfurt what would have been the biggest ever German share issue had to be cancelled, as Volkswagen eyed with alarm the market’s eight percent fall.

As Wall Street recovered, other stock exchanges followed suit, with big buyers seeking to take advantage of the rock bottom prices.

Nevertheless, despite the current strength of the US and UK economies, there is an underlying fragility that no amount of tinkering can overcome. The Guardian thinks that a solution could be found in the introduction of a “small ‘transactions tax’ on cross-frontier sales of stocks and currencies. This would have the double effect of cooling excess activity while raising money to finance the welfare state at a time when voters are reluctant to pay taxes” (editorial, October 29). Talk about using a sticking plaster to cover a gaping wound.

To prevent capitalist meltdown, and barbarism, requires the world proletariat to make revolution in the advanced countries.

Paul Greenaway