History of the world economy

A new stage in the capitalist crisis

By Alan Woods
6 January 1998

Fears of recession grow

"Typhoon in east Asia; North America and Europe feel barely a breeze. That, in a nutshell, is the official view of the financial crisis that has laid waste what was once the most dynamic part of the world economy. It is a comforting view. It is not implausible. But it is not the only possibility." (Financial Times, 2/1/98.)

Shortly after the October 97 stock exchange crash, Alan Greenspan, head of the US Federal Reserve, delivered a speech at a charity dinner in which he assured the illustrious guests that everything was fine and the US economic performance "impressive". The optimistic declaration of Greenspan, Clinton and others after the crash were entirely predictable. These people imagine that the cause of the crisis is subjective, the mood of investors ("confidence"). What Greenspan's fellow guests did not know is that, even while he was speaking, an aide was surreptitiously passing him updates on the state of the market, so he could judge the effect of his every word! This little detail in itself is sufficient to show the extreme nervousness of the American bourgeoisie. True, the stock exchange later rallied, mainly on the basis of a large number of small investors who were foolishly persuaded to buy shares in a falling market, after the big monopolies had already sold their shares the day before. This rally, however, is of a temporary and unstable character. Further big falls are inevitable.

The fall on Wall Street, despite all the attempts to play it down, was a serious one. Historically, the Dow Jones changes on a daily basis between 1-2 per cent. On Monday 27th October 1997, there was a fall of 7 per cent, the 12th worst fall on record, though less than the spectacular crash of 1987. The rise on Tuesday was 4.7 per cent, quite a steep rise, which did not however recover the ground lost. Despite this fact, US shares are extremely overvalued. This, in itself, is enough to ensure a further and more severe fall in the future, and probably not too far away.

Impressionistic as ever, the so-called "new paradigm" economists promptly decided that the crash was an "over-reaction". There are none so blind as they that will not see! They argued that since only 4 per cent of US exports go to Indonesia, Thailand, Malaysia and the Philippines, the damage would be negligible. The only reason for the crash was that the stock market was over-valued. "It doesn't take much to derail a market that has gone to the moon" said Stephen Roach, chief global economist of Morgan Stanley Dean Witter. (Time magazine, 10/11/97.)

Wall Street decided that the crash was "a market event" that is, something exclusively caused by the over-valuation of shares and nothing to do with the "real economy". Now it is quite true that the mania for buying and selling shares has a dynamic of its own, separate and apart from the real economy. However it is not true that the two things are entirely separate and that one cannot and does not affect the other. Worries about the state of the real economy, under certain conditions, can translate themselves into panic buying or selling on the stock market. Thus, in a perverse logic, when unemployment falls in the USA, shares also fall. This fact is, in itself, a striking confirmation of the fact that the interests of the workers and capitalists are completely antagonistic. News of more jobs is manifestly good for the workers and unemployed, but is taken as bad news by the owners of shares, concerned that less unemployment will lead to upward pressure on wages and (allegedly) prices. The converse is also true. While not every stock market crisis leads to a slump, under certain circumstances, the one can lead (with the delay of a few months) to the other. We will elaborate on this later.

After the initial shock, the capitalists recovered their nerves. On all sides we read reassuring statements. President Clinton reminds us that "the fundamentals of the US economy are sound." "There is no reason to think the US stock market is going to be a bear market" says economist Allen Sinai at Primark Decision Economics, "The US economy is not going to be knocked down by a crisis in Asia." And last but not least Alan Greenspan, the same man who warned twelve months ago against the "irrational exuberance" of the stock market, hastened to soothe the jangling nerves on Wall Street: "Our economy has enjoyed a lengthy period of good economic growth, linked, not co-incidentally, to damped inflation. The Federal Reserve is dedicated to contributing as best it can to prolonging this performance."

It is interesting to compare this comforting observations with the speeches made by all the bourgeois politicians and economists before, during and even after the Great Wall Street Crash of 1929:

"Representatives of thirty-five of the largest wire houses assembled at the offices of Hornblower and Weeks and told the press on departing that the market was 'fundamentally sound' and 'technically in better condition than it has been in months'. It was the unanimous view of those present that the worst had passed. The host firm dispatched a market letter which stated that 'commencing with today's trading the market should start laying the foundation for the constructive advance which we believe will characterise 1930'. Charles E. Mitchell announced that the trouble was 'purely technical' and that 'fundamentals remained unimpaired'." (J.K. Galbraith, The Great Crash 1929, p. 126.)

And again:
"Eugene M. Stevens, the President of the Continental Illinois Bank, said, 'There is nothing in the business situation to justify any nervousness.' Walter Teagle said there had been no 'fundamental change' in the oil business to justify concern; Charles M. Schwab said that the steel business had been making 'fundamental progress' toward stability and added that this 'fundamental sound condition' was responsible for the prosperity of the industry; Samuel Vauclain, Chairman of the Baldwin Locomotive Works, declared that 'fundamentals are sound'; President Hoover said that 'the fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis'." (Ibid., pp. 127-8.) Galbraith's description of the mood on Wall Street after the initial crash might have been written yesterday:

"Almost everyone believed that the heavenly knuckle-rapping was over and that speculation could be now resumed in earnest. The papers were full of the prospects for next week's market. Stocks, it was agreed, were again cheap and accordingly there would be a heavy rush to buy. Numerous stories from the brokerage houses, some of them possibly inspired, told of a fabulous volume of buying orders which was piling up in anticipation of the opening of the market. In a concerted advertising campaign in Monday's papers, stock market firms urged the wisdom of picking up these bargains promptly. 'We believe', said one house, 'that the investor who purchases securities at this time with the discrimination that is always a condition of prudent investing, may do so with utmost confidence.' On Monday the real disaster began." (Ibid., pp. 128-9.)

The times may have changed, but the system and the mentality of its representatives remain exactly the same! And the effectiveness of this kind of speech-therapy in preventing a slump is about the same of the mumbo-jumbo of the medicine-man in curing cancer. Greenspan, evidently forgetting his earlier warnings, now claimed that the fall in share prices was "a salutary event". This overlooks the fact that one year ago when he first issued his warning about "irrational exuberance", the Dow Jones index had reached the record 5,000 mark. Before the present crash it had passed 8,000. But even now it stands at well over 7,000. This still defies the economic laws of gravity. Further buying will push it still higher, preparing the way for further, even more catastrophic falls. Greenspan is evidently aware of this, but, under the given circumstances, clearly believes that discretion is the better part of valour.