financial crisis
26 Nov 2008
How Much Can A Market Bear?
As the markets continue to plummet, Ben Eltham assesses the state of the "shareholder society" that John Howard famously promoted
Remember the "shareholder society"? It was one of cherished dreams of John Howard, who championed the idea of ordinary citizens investing in the stock market.In a 1999 speech to the Queensland Chamber of Commerce and Industry the then prime minister celebrated the privatisations that his government had undertaken, which had helped, he said, "build a nation of shareholders with almost 4 million Australians directly investing in the share market".
"In less than four years, more than one in 10 adult Australians have become shareholders for the first time," he declaimed. "Nearly 2 million Australians have purchased shares in Telstra. All of them have a direct stake in the growth industries of the future."
And so they did. During the Howard years, Australians took to share market investment and trading with gusto, egged on a by a privatised ASX that held "investor seminars" up and down the country. Financial innovation also enabled small investors to access sophisticated investment tools like Contracts for Difference and margin loan facilities.
Ordinary investors helped supercharge the long Australian share boom that ended in 2007. As financial journalist Michael West wrote in January this year, "the rally in share prices since early 2003 has gone hand-in-glove with the spectacular growth in Contracts for Difference (CFDs). Like any leveraged product, a CFD delivers turbo-charged returns — if you are on the right side of the trade."
But how do we figure out where the right side of the trade lies? There is much to be said for improving the financial literacy of ordinary citizens. As Warren Buffet noted in a recent New York Times article, leaving your money in a savings account is one of the worst things you can do with it long term.
Of course, the length of the term is what matters, as John Maynard Keynes famously quipped. If you'd invested in the US stock market in the 1970s, you wouldn't have seen any capital appreciation until after 1982. But over the course of 20 or 30 years — the kind of long term investment timetable that helps to insulate you from short term volatility — shares seriously outperform cash.
If you'd left your money in cash this year you'd still have it all — unlike the haemorrhagic losses of anyone who had investments in Australian equity markets, let alone the poor souls with margin loans or significant holdings in dead companies like ABC Learning. Of course, each dollar you own would be worth around 4 per cent less, due to inflation, but you probably made a few per cent in interest in a savings account, leaving you just about even. In the context of a stock market currently trading at around half its peak, even-stevens is pretty good.
In the bigger picture, however, the long-term performance of equities "smoothes out" the tremendous wealth destruction of share market collapses. The problem is, many Australians now investing do not remember the last long term bear market in global equities that ended in 1982. Despite the dramatic events of October 1987 and the subsequent recession of the early 1990s, stocks soon resumed their bull run. Now we're in another long term bear market, and ordinary citizens are hurting. This one will continue for some time, driven by economic fundamentals like a global recession in the rich world economies.
The problem is that with so many Australians now holding equities portfolios, the effect on consumer sentiment of massive losses in those portfolios (even if they are only "on paper") are significant. Whether or not you believe in the "negative wealth effect", the effect of having to make massive margin loan calls is real for many investors. Money tipped into CommSec or a similar margin loan facility is money that can't then be spent at the cafe, the hotel or the shopping mall.
How big has the wealth destruction of recent stock market falls been? Really big. A lot of the biggest recent falls on the ASX have been in the blue chip mining companies many small investors mistakenly thought were "safe". The plunge in world commodity prices over the past month has hammered BHP and Rio shares, while the losses at small miners have been even worse.
The "shareholder society" encapsulates the problems of neo-liberal economic thinking. As ever more people and aspects of society are exposed to the forces of unfettered free markets, so too are ordinary citizens exposed to more risk. Unfortunately, many of us don't understand these risks. In good times, everyone makes a lot of money. In bad times, ordinary investors are wiped out and the panic can spread across the economy.
Of course, there is another way in which western nations are becoming "shareholder societies". Taxpayers are becoming owners — or guarantors — of large financial institutions like Citibank. Over the weekend, the massive global bank was bailed out by the US Government with taxpayers taking on large parts of the company's toxic debts. Citibank, of course, was "too big to fail".
This, then, is the "shareholder society", 2008 style. It's where a whole society becomes a big shareholder in major corporations — and their losses.
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How long, and for how much, can governments continue to bail out big companies? Why do people have to subsidize these institutions who have been indulging in an orgy of gambling, whilst the bone fide investor has to foot the bill? It probably sounds like a wacky idea, but why doesn’t the government hand out money to the people who were king-hit on the Bourse? At least it would help to ameliorate the pain of the people who are suffering. It’s all like Alice Through The Looking Glass; but without the fun.
Why are people less important than companies. Especially companies who pay obscene amounts of money to their executives?
It’s not just a question of us and them.
If the Keynesian era is really over, then what will take itsw place?
Marxist, Leninist, Maoiust philosophy? How about Trotskyist neo communists like Putin and Medvedyev?
Now that is scary is’nt it!
That’s why these newly elected "saviours" like Rudd and Obama are devoud of anything new. Their advisers are the same as before, even more so.
Does anyone who really needs to borrow money getting it any cheaper than before the crash?
Except if you are a bank of course.
The differences between 1987 and 2007 are enormous.
Before the 1987 crash, the financial pages were warning of impending doom with the wildly erratic behaviours of the likes of Chase, Bond, Holmes-a’Court, Adler (Larry not his idiot son)
The smart money was going into property so that by the time Oct 20 came along, you guessed it, the property values had soared.
Followed by interest rates which was to keep shares and equities in the doldrums for years.
Now we have lower interest rates, lower property values and lower share values.
But inflation and unemployment are going up.
The law of the jungle, Howard’s doctrine, otherwise known as the "market" usually sorts itself out in the long run.
Governments are usually not interfering in the process, except Howard was schizoid with Telstra and had no idea about the Reserve or the ACCC (Fair )Competition control.
The foxes usually eat all the bunnies and then their numbers start to dwindle, then the bunnies" numbers rejuvenate and so do the foxes etc etc.
Now what happens when you decdide to keep feeding the foxes after the bunnies die out, right, you’re lefty only with foxes. Then you get them turning on themselves, hence WW2 after the Great depression of 1930’s, and how will this one end?
Not rocket science is it?
Thanks revilo. But in case you’d forgotten, this discussion falls within the HUMANITIES area, so you may prefer to take those experiments elsewhere – you know, the ones about which dung beetle wins in a free-for-all bout with other dung beetles [the eugenicists and neo-Darwinians seem to just lurv this massive crash and its looming genocidal potential].
Ben, the bail outs are a HEIST; you keep getting it wrong on this issue. There is no ownership or even (properly defined and legally valid) "guarantor" function for the common people in these bail-out scams. People worldwide are being saddled with the continued responsibility of feeding these parasitic entities, whether they call themselves merchant/commercial banks or hedge funds. The bill for the US alone has now reached USD 8.5 Trillion (Bloomberg states 7.8 trillion, and another vested interest has it aroung 5 trill). Such massive treasure has been pumped, all via various channels, ultimately into the same derivatives black hole! You know, the great chasm of Greenspan’s fakery post-87, hitherto run by “sophisticated instruments” of exchange devised by propellor-head fraudsters who were recently awarded Nobel prizes.
Recall that the origin of this systemic disintegration - and the ongoing market crashes within that breakdown - is the gargantuan bubble of fake debt-money called derivatives (“sub-prime” was just one of these crashes, and by no means a causal one). The derivatives are unpayable, and they were always unpayable. If there had been no derivatives then there would have been no hyped, mythical neolib "prosperity" through globalization. The whole silly project would have screeched to an inglorious halt by the early 90s. Many more people would have been compelled to try earning their riches, rather than faking, conning and gambling.
Therefore, it is simplistic, misleading and rather superfluous to state that "unfortunately, many of us don’t understand these risks" i.e., exposure to market risks. For example, I understood from the start that the six figures of my (I use the word "my" very conditionally) superannuation fund had no real reliable value. I wasn’t allowed to touch it anyway, it was primarily a slush for fund managers, and I knew that the funny money was going to vaporize fast once the system imploded. What’s the difference if I’d been oblivious to or puzzled by such facts?
Similarly, the neolib "shareholder society" myth itself is a massive con. That seems to echo Mark Latham’s latest effort in AFR where he trots out a Fabian-approved scheme for communal, anarcho-syndicalist basket weaving. The logical and ultimate result of such regressive tosh is warfare and extortion by mercenary bands a la the 14th and 15th centuries. Oh, but then, such a dark age would seem to be the whole point of this systemic disintegration and the political leaders’ continued refusal not just to act, but to acknowledge the calamity’s cause.
I’m with mil-observer. The massive bail-outs, at Taxpayer expense, is actually losses being Socialised!!!!!! In other words, this Free Market crap is wonderful for some people, especially those CEO’s etc on millions of dollars per year, who somehow manage to still get paid even more money the worse the company actually performs. I see where AIG (I think that was it, there are lots of them) actually paid their executives over 500 million dollars in ‘bonuses’ after being bailed out by the American taxpayer to the extent of billions of dollars. This has scandalised the US population. When all is going well (for them) and profits are rolling in from very shonky deals they scream and howl for MORE DE-regulation, the release of the Free Market!! As soon as the s**t hits the fan, and things go bad, they scream for bail-outs from the Taxpayers. But point out to the people involved that this is actually Socialism, and they squirm and mumble and deny.
Capitalism as has been practiced by the Yanks and their acolytes in Europe and here is TOTALLY UNSUSTAINABLE, if nothing else. Ever increasing consumerism, the rape of every resource to feed the never sated guts of Capitalism, has turned our planet TOXIC!
Already, we need another planet to feed the ‘growth’.
I see Peter Harcher in the Age this morning, a Free Marketeer of the lowest kind, is trying to put a put a gloss on the mess, in what I hope is an absolutely vain attempt to save this abomination. OK, you all say then what is the answer. The answer is for Governments to take back control of their own economies from the Corporations. Then, make rules that must be obeyed and must not be watered down for the control of these markets. And the idea that we can keep on growing forever has to be seen for what it is … a disaster in the making. Populations MUST be controlled. What we are heading for are massive wars for resources, like water, food and air. Air and food that is now actually corrupted, and is killing us. The water is poisoned.
It has always been that Governments have insisted that they can control Free Markets. They have been proved wrong time and again. Greed and corruption ensures that Governments become captive to Capitalism, and markets scream and moan for de-regulation, more and more of it, and in the USA most of all, they got their way, from a lot of the very people that Obama has now appointed to his Financial advisory and operations boards.
How those people are going to do ‘change’ and fix the mess that THEY made is quite beyond me. Bush used the G20 meeting to push to retain the very system that crashed because of corruption.
That man knows no shame! But he knows that it may be very worthwhile to him personally in years ahead to keep a lot of the old mates happy. Just as Bill Clinton has!
So I do think that we are going to keep on doing the same old same old! There really is NO chance for this poor old Earth!
As for Elmer Fudd, he is a Free Marketeer, by inclination and marriage, and although he knows what the trouble is and has been, there is no way that he is going to buck Big Business and do anything about it. None of them will.
Global Corporations now are so BIG that they can snap their fingers and Governments of all sizes and ilk come running, bowing and scraping, to do their bidding. Just look at the Mad Mexican and Telstra. They really do EXPECT that their ‘proposal’ for the FTTN internet will be accepted by the Government, and Conroy an his mob will eat ‘crow’. Unfortunately, so do I!
Dazza.