Nightmare on Wall Street

The financial turbulence of recent days has wiped billions off the price of shares all around the world. On Friday August 10th London’s stock exchange, the FTSE 100, alone dropped £63 billion. What does this mean?

The financial turbulence of recent days has wiped billions off the price of shares all around the world. On Friday August 10th London's stock exchange, the FTSE 100, alone dropped £63 billion. What does this mean? Obviously market capitalisation, as it's called, is just a paper price. The same firms are still employing the same workers and making the same things. But these firms are suddenly worth £63 billion less than twenty-four hours before. And this should sound alarm bells for their workers - and for the rest of us.

wall_st.jpgCertainly, somebody's worried. The European Central Board is an austere body that seems to spend most of its time telling us we can't afford things. In a dramatic change of style, the ECB, the Federal Reserve Bank of the USA and the other central banks of the world threw $323 billion (£160 billion or so) at the financial markets in two days - August 9th and 10th.

The monetary authorities are concerned about a possible meltdown of the global financial system.

The origins of this stampede are in the US sub-prime loans scandal. Over the past few years, house prices have gone through a bubble in many advanced capitalist countries, including the USA. The bubble has been fed by easy credit terms powering house prices ever upward. In the States dodgy lenders have been chucking money at poor people who couldn't possibly afford to keep up repayments. These financial institutions have in their turn extracted their pound of flesh from those they regard as high-risk (sub-prime) borrowers. This sounds like a squalid corner of the money-lending world. It is.

foreclosureThe watchword of these lenders is the same as the speculators before the 1929 Wall Street crash. Pass the risk on to ‘the greater fool.' The house price bubble has burst in the States, leaving people to contemplate the fools' paradise the housing market always was. What about the sub-prime borrowers? Most have had their houses repossessed. Many of them are homeless. Forget about them. They're little people. They don't matter.

But this sordid little set-up is linked to, and threatens the existence of, the most respected and conservative banks in the world. Here's how. Financial operators in the City are sometimes described as ‘innovators' in the financial press. As far as we can see, most of them couldn't even invent the wheelbarrow - unless it was to take their bonuses home with. Nobel Prize winners in maths have been lured to the City in order to invent arcane formulae that guarantee to beat the markets! What this ‘innovation' usually amounts to is splicing and dicing financial instruments into ever more fancy pieces of paper. And one component of these bits of paper that all the geniuses in the City have been buying up is the toxic sub-prime mortgages.

Capitalism is a system where we all depend on everyone else for a livelihood, but we don't realise it. The way production is socialised and held together in the absence of a socialist plan is through the financial system. So, if large chunks of the banking system disappear into the wide blue yonder, it could have big repercussions for all of us.

The way capitalism is sold to us is this: most of us just want to get on with our lives. Fortunately there is a minority of risk-loving entrepreneurs who make things happen. It's all rubbish.

housing_bubble.jpgFirst we were told there are people in the City with brains the size of Saturn who understand the intricacies of high finance in ways most of us are totally incapable of. These guardians of the gate for the big banks didn't spot a thing and didn't raise the alarm. The present stampede shows these people are just cattle.

Secondly, capitalists are supposed to take risks. Well, they all betted on losers - credits that included the worthless sub-prime mortgages. So do they lose their money? No - the central banks hand it back to them and say, "Why don't you put it all on the black and see if you win this time?" Correction: the central bankers take our money and hand it to the incompetent losers and outright crooks who run the financial system to give them another punt.

Will the pandemonium spread to engulf the real economy? We don't know yet. What we do know from this incident is that capitalism offers us a life of permanent insecurity

Footnote

Stock exchange gyrations were the big story at the end of last week. There was a smaller story. The National Institute for Clinical Excellence decided not to allow a drug that slows the onset of Alzheimer's disease to be prescribed on the National Health Service. NICE says the drug is expensive. It is. If prescribed, it could hugely improve the quality of life of people with creeping dementia.

Even more important, it could offer relief to their carers. Most Alzheimer's sufferers are looked after at home by people who may themselves be elderly and in poor health. They are not paid, often have to give up employment opportunities to look after the patient and get very little help from the state.

Carers are funny people. They don't think about money all the time. They are driven by a commitment to their loved ones. In the case of Alzheimer's, the sufferer may not even recognise their carer.

When NICE says we can't afford the Alzheimer's drug, think about the £160 billion the central banks threw at the financial markets in two days.

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