Pulling our socks up

Share markets around the world have been volatile through most of this year. The USA’s the S&P 500 index reached 1,363, a three-year high, in April and dropped to 1,099 in October. In August, the Dow Jones Industrial Average see-sawed up and down by more than 400 points.

Tokyo’s Nikkei 225 index dropped from a high of 10,843 in February to 8,605 in March (due to the Japanese Tsunami) and continued to fluctuate, falling to a low of 8,160 in November. Germany’s DAX oscillated between 7,528 in

May and 5,072 in September.

The unpredictable fluctuations of the world’s stock exchanges have been due to the general uncertainty caused by the long world recession, which has been exacerbated by the European Sovereign Debt Crisis (Euro Crisis for short).

Meanwhile, speculators have continued to clutch at straws, the latest of which was a minor boom in Saudi Arabian shares. Edgy speculators, armed with similar computer simulation programmes, have followed the herd in investing or divesting based on news and rumour, causing lemming-like mass rushes up or down.

For example, the announcement of a deal on Greek debt was followed by an international surge in stocks on October 28, with the DAX peaking at 6,430 before finishing the day at 6,337. The focus of worry has been on the European trio of Ireland, Portugal and Greece, which have relatively high debt to GDP ratios.

Euro Crisis

The origins of the Euro Crisis lie in the huge boom in investment that occurred in the new millennium. The rapid growth of the economies of newly industrialised countries such as China, India, Brazil and South Africa gave enormous income surpluses to the investors of those countries.

Searching for ever-greater returns, these investors forsook conservative, regulated investment channels for more lucrative ‘de-regulated’ ones; for example the US market in ‘sub-prime derivatives’, the bundles of mortgages which were traded and fuelled that country’s property bubble.

Following the speculative trend using their similar computer simulation programmes, investment consultants and stock brokers recommended these ‘toxic assets’ to their clients. Among the clients who followed this advice were the banks and investment funds of the Eurozone. Parenthetically, it should be noted that some of these ‘experts’ had no knowledge of what they were talking about – one, who was regularly sought for his opinion by the BBC, confessed that he had been a hippy-esque trinket seller in India before becoming a London stock broker at his brothers behest!

When USA’s sub-prime mortgage/property bubble burst in 2008, it not only inaugurated a world-wide economic recession, it also dragged down with it the countries which had been investing heavily in its toxic derivatives.

Among those worst affected were Iceland, Ireland, Portugal and Greece. Iceland, with the smallest of these economies, defaulted. There were fears among investors that the other three would do the same. Fear of default drove up the rates at which these countries could borrow money, thereby escalating their debt in a vicious cycle.

One of the major contributory factors to fears of default was the securities rating agency Standard and Poors downgrading of the sovereign debt ranking of these economies to ‘junk bond’ status. This caused a flight of capital away from these countries, thereby further degrading their ability to repay loans.

The reason why the Euro Crisis has dragged on so long has been the inability of European leaders to come to a reasonable agreement to bail out the near-default economies. Their inability to do so has been caused by fears of losing money.

Herb Brooks, who coached the US Ice Hockey team which beat the Soviet Union in 1980, once said ‘You’re looking for players whose name on the front of the sweater is more important than the one on the back.’ The name on the back of the jersey being the player’s, that on the front being the country’s.

Greed for profit

Individual countries in the Eurozone have put their own needs before that of the entire European economy. This in turn has been driven by the inability of individual companies and investors to put the needs of the mass before their own greed for profit.

A similar situation faced the USA in the 1930s. Following the Wall Street Crash of 1929, the Government of Herbert Hoover continued to follow laissez faire, profit-driven policies, driving the country into a W-shaped dual slump. Enter Franklin D Roosevelt, the greatest US President of the 20th century.

He saw the forest despite the trees and saw the importance of saving capitalism was greater than that of protecting individual profit. Depending on Keynesian economics, he put in place infrastructural programmes to drag the economy out of recession.

Military expenditure

‘FDR’ built the American Welfare State, which lasted until the onset of the plague of Reaganomics in the 1980s. The current long recession has its roots in the deregulation begun by Reagan, who put company profits before country.

When Barack Obama was elected president, he was in a far better situation than FDR had been. The recession was not so far gone that the lunatic policies of the Bush Administration could not be reversed. However, instead of being the modern FDR, Obama opted to be the 21st Century’s Hoover.

Instead of bailing out the poor people who had lost their homes to foreclosures, Obama continued Bush’s policy of compensating the same people whose greed had caused the crisis in the first place. The Euro-crisis is not as big as all that. The combined debt of the three worst-affected countries is US $ 3,510 billion – less when one deducts the foreign assets these countries own. The annual repayment on these loans is less than half the US $ 700 billion the US annual military expenditure.

The Euro Crisis can be solved if the countries of the world get together and acknowledge that we face potential global economic meltdown. This can be prevented only by global-scale regulation, sacrificing the profits of individual companies for the common good.

We must pull our socks up can learn from past mistakes. After all, Herb Brooks also said ‘maybe I'm a little smarter now than I was before for all the stupid things I've done.’