SELL, SELL, SELL!

SELL, SELL, SELL!

Commentary

Zack Breslin

There has been increased turmoil and panic in financial markets over the last week. By Tuesday, $4 trillion had been wiped off global stock markets. In America, where the rout began, the Dow Jones experienced its biggest ever points decline on Monday although by Tuesday some of the losses were recovered. Similar shocks were recorded in Asian and European stock markets. In Britain, the FTSE hit a one year low on Monday before falling further on Tuesday (its largest percentage fall since the Brexit vote). Once again, stability in financial markets is being questioned.

The fall in stocks comes after a year of steep rises, buoyed in part by the election of Donald Trump and the implementation of his pro-business policies of deregulation and massive tax cuts for corporations and the wealthy. But Trump can’t claim all the credit—stocks have been rallying for nine years, a result of the low interest rate money that Central Banks have been injecting into the system since the crash of 2008.

What has caused the latest shock in stock markets? Perversely, the reason for speculator fear appears to be economic news that is undoubtedly positive. On Friday, US job market figures showed average wages rising by 2.9%. These figures have led to fears that the Federal Reserve (the U.S. Central Bank) will implement more interest rate hikes than was previously expected. This threatens the life-blood of bankers and market traders across the globe; the low interest rate money that Central Banks have been lending to commercial banks. The era of cheap money which has fuelled the stock market bubble over the last nine years may be coming to an end and the market reacted with panic selling.

There is a cruel irony in the notion of modest wage increases for ordinary Americans leading to stock market falls; the speculators, bankers and CEOs who benefit most from the stock market have seen their incomes soar in recent decades whilst wages for the bottom 90 per cent of Americans have stagnated and in many cases fallen. Once upon a time, rising wages were a key indicator of a well-functioning capitalism. It’s a sign of the weird and selfish realm that capitalism presently operates in that such a mediocre improvement in the lot of the working classes now results in panic selling across the globe.

The stock market losses are also a sign of how inherently unstable capitalism still is. Nervous financial analysts are currently insisting that the large losses were a “correction” and that there is no risk of a major crash and subsequent recession. That American stock markets rose on Tuesday seems to bear this out (although European stocks continued to plummet) and provided there are no further shocks in the short term we can put the losses down to a temporary panic. Nonetheless, experience tells us that another crash will come, perhaps sooner than expected.

The history of modern capitalism is punctuated by sharp economic shocks that result in recessions or depressions (a prolonged, deep recession). The most notorious example is the Wall Street Crash of 1929 which caused the worst depression of the modern era but other severe examples include the depression of 1873, the Asian Financial Crisis in 1997 and, of course, the Great Recession of 2008. Indeed, the crash of ’08 was merely the culmination of a long period of economic instability beginning in the mid-1970s when the post-war economic miracle began to dissipate and was replaced by the increasing financialization of the economy.

The Great Recession occurred when the financial house of cards constructed by bankers and speculators repackaging debt and selling it on to each other (whilst lavishly awarding themselves obscene bonuses in the process) collapsed. A depression was prevented because governments around the world injected a huge amount of money into the system—$12 trillion by some calculations. The financial services industry, the culprit behind the crash, was the main beneficiary and was amongst the first industries to fully recover. Profits, salaries and bonuses in financial services are now back to pre-crash levels.

While the financial sector was resurrected by the public sector, the actual causes of the crisis were never properly addressed. Meaningful regulation has barely increased and the cheap money that was provided to banks to shore up the system has contributed to speculative bubbles in housing markets and the stock market. Banks that were deemed too big to fail in 2008 are now bigger than ever. The experience of the last decade has shown that when financial services risk-taking fails, government will take the hit, meaning that there is significant motivation for excessive risk-taking (it’s a heads I win, tails you lose situation!). In short, very little has been done to reduce the potential for systemic risk. The financial edifice that came crashing down in 2008 has been resurrected in a similarly unstable form.

The shocks of recent days are based on fears that the days of cheap money that helped navigate economies away from outright depression are coming to an end. Whether heavily indebted banks and businesses are on a sound enough footing to adapt to this change remains to be seen. If they are not, then another sharp recession is on the way. Whilst the end of cheap money from Central Banks could perhaps initiate such a recession, the continuation of this policy would see asset bubbles continuing to grow as markets are flooded with cheap money, inevitably culminating in a crash that initiates… a sharp recession. A perfect example of how capitalism tends toward crisis, regardless of policy. Capitalism is full of these contradictions and when there is a high degree of financialization within the global economic system (as there was prior to 1929 and 2008, and as there is now) capitalist crises can spread rapidly and prove disastrous to ordinary people around the world.

Could we be on the verge of another such financial crash? Who knows? Certainly not the vast majority of economists and financial analysts—the few who predicted the last crash were outnumbered a thousand-to-one by experts predicting a “soft landing”. However, there are indicators that a crash is brewing. Housing bubbles are springing up all over the world (including in the U.S. again) and financial trading is even more complex then it was in 2007. There is evidence that some of the financial products being sold by investment banks as low risk are in fact the opposite, a practice that was one of the primary causes of the last crash.

Nearly all of the dysfunctions of financial capitalism that existed pre-2008 are present today but there are also newer, unfamiliar risks. Market trading is increasingly conducted using complex computer algorithms that buy and sell shares in microseconds (one millionth of a second) and in nanoseconds (one billionth of a second). In 2013, a group of physicists published a research paper which identified an “emerging ecology of competitive machines featuring ‘crowds’ of predatory algorithms” in global financial markets, arguing that algorithmic trading had gone beyond the control and understanding of the humans who had designed the system.

These trades now amount to a third of all market transactions in the UK and up to 70% of trades in the U.S. The stock market falls of the last few days can be viewed, partially, as a case of panic selling by Wall Street robots. Of course, it is rational to panic when stocks are falling, and the algorithms that conduct these trades are programmed to respond to economic indicators the same way the very best human traders would, only infinitely quicker and backed up with immense computational power. Needless to say, the risks associated with algorithmic trading are poorly understood but one can imagine a number of scenarios where algorithms initiate a stock market crash similar to 1929. These include malicious hacking, programming errors, and even algorithms designed to initiate a crash and subsequently profit from it. At the very least, algorithms take their cues from stock prices and economic news just as human traders do; there is nothing to suggest that the herd mentality that contributes to stock market crashes couldn’t occur amongst our robot friends.

We live in a brave new world of weird and poorly understood risks to our economic system. But these new risks are complemented by longer standing risks such as speculative bubbles and risk-prone investors. It is worth remembering that history has shown that capitalist economies can function with a high degree of risk for decades, before eventually succumbing to a calamitous crash. A crash is inevitable, but it might not occur in the next ten years. Or it might come next month. SELL SELL SELL!!!

 

Zack Breslin is the News Editor at The Scum Gentry Alternative Arts and Media. You can read his blog on Irish politics at www.thezackattackblog.wordpress.com or follow him on Twitter at @zack_breslin to keep up to date with his latest writing projects.

Recommended Links