Worst week for global markets since 1929

Worst week for global markets since 1929
By Barry Grey
11 October 2008

World stock markets plummeted Friday, ending a week that saw the
biggest collapse in share values since 1929. The looming threat of a
world depression provided the backdrop for a meeting of finance
ministers from the G7 industrialized countries, who gathered in
Washington for emergency talks with US Treasury Secretary Henry
Paulson and Federal Reserve Board Chairman Ben Bernanke.

After a day of panic selling on markets from Asia to Europe and Latin
America, and wild swings on the US stock market, the G7 issued a
statement that pledged to place the resources of their respective
countries at the disposal of the most powerful banks, but failed to
outline any specific coordinated actions to stem the slide to economic
disaster.

Paulson issued a statement and held a press conference following the
meeting to announce that the US government would use the virtually
unlimited authority granted it under the $700 billion Wall Street
bailout passed one week before by the Democratic Congress to begin
directly buying stock in banks and financial firms, an expansion of
the government transfer of taxpayer funds to the most powerful
sections of the financial aristocracy.

Major stock exchanges in Asia and Europe registered losses on Friday
even greater than the 7.3 percent drop in Wall Street’s Dow Jones
Industrial Average on Thursday. Japan’s Nikkei index fell 9.6 percent
to its lowest level in five years. Since the start of the week, it has
lost 24 percent of its value. Toyota shares dropped by 6.2 percent and
a major Japanese insurance firm filed for bankruptcy.

Hong Kong’s Hang Seng Index plunged 7.2 percent. Australia’s S&P/ASX
200 index fell 8.3 percent and the broader All Ordinaries was down 8.2
percent. The Shanghai Composite Index declined 3.6 percent, leaving it
12.8 percent lower than it was a week earlier. The Indonesian stock
exchange, which closed earlier in the week because of panic selling,
remained suspended.

In Europe, the pan-European Dow Jones Stoxx 600 index fell 7.5
percent, which ranks among the worst one-day performances on record
for the index.

London’s FTSE finished Friday down 8.9 percent. Since its last peak in
June 2007, it has declined 43 percent. Friday marked the British
index’s fifth consecutive losing day, during which it lost 20 percent
of its value.

France’s CAC-40 index fell 6.8 percent and Germany’s DAX 30 plunged 7
percent. Trading in Italy, Russia and Austria was halted. The last of
Iceland’s major banks collapsed and was taken over by the government,
and all stock trading remained suspended.

Markets across Latin American were lower. The Mexican central bank was
forced to auction off $6.4 billion in foreign reserves to prop up the
peso.

The MSCI World Index—a measure of international share prices—was down
19 percent for the week, its worst performance since records began in
1970.

An indication that the financial crisis is now plunging the world
economy into a major recession is the fact that, alongside bank
stocks, shares in oil, metal and other basic resource firms fell
sharply.

“What we are witnessing is mass selling on a global scale due to a
combination of sheer panic and fear, combined with complete
uncertainty over the future of the world’s major economies,” said
Martin Slaney, head of derivatives at GFT.

In the US, most stocks ended lower after the wildest intra-day swing
in history. For the first time in its 112-year existence, the Dow
Jones Industrial Average gyrated in a range of more than 1,000 points.

The Dow fell 696 points in the first 15 minutes, falling below the
8,000 mark. Later in the day it was up by more than 320 points, but
closed with a loss of 128 points, or 1.5 percent, ending at 8,451.

That marked the eighth straight losing session for the index, which
gave up more than 1,870 points, or 18.2 percent, in the course of the
week. The weekly loss outstripped the week that ended July 22, 1933,
in the depths of the Great Depression, which registered a 17 percent
drop—at a time when there were six trading days in a week.

Since its record high a year ago, the Dow has lost 40.3 percent,
wiping out $8.4 trillion in stock values.

The Standard & Poor’s 500 Index sank by 10.7 points, falling below the
900 mark to 899. The S&P 500 is down 42.5 percent from its 2007 peak.
The Nasdaq Composite Index finished the day with a slight gain of 4.4
points, but was down 15 percent for the week.

It was the worst week ever for Wall Street, with both the Dow and the
S&P 500 recording their biggest weekly losses in point as well as
percentage terms.

Most financial stocks rose, in the expectation that the G7 and Paulson
would announce new bailout measures. However, Morgan Stanley, which is
widely seen as the next likely bank failure, fell 22 percent, and
Goldman Sachs lost 12 percent.

Ford Motor Company stock fell another 4.33 percent and ExxonMobil
ended down 8.29 percent.

The Toronto stock exchange fell 535 points.

“There is a downward spiral of fear,” said Richard Sparks, senior
equities analyst at Schaeffer’s Investment Research.

The seize-up of credit markets showed no signs of lifting. Banks are
hoarding their cash and refusing to lend to other banks, or charging
usurious interest rates, because they have no confidence in the other
banks’ solvency.

The three-month Libor rate, a key lending benchmark for inter-bank
loans of US dollars, climbed to 4.82 percent, the highest in nearly
ten months. The flight of capital to what is deemed the safe haven of
US government debt deepened, resulting in a decline in the yields on
one-month and three-month Treasury bills to nearly zero.

Hedge funds, whose previous outsized profits have turned to losses,
are contributing to the panic sell-off of stocks. Many of these firms
are facing redemption demands from clients as well as demands from
their bank creditors for more collateral and larger margins on their
borrowings, and are dumping stocks to raise cash.

Amid the market turmoil, the reality of the decay of American
capitalism was summed up by the fact that General Motors felt
compelled to announce that it was not contemplating filing for
bankruptcy. After decades of plant closures, wage cuts and attacks on
the benefits and pensions of auto workers, justified by the claim that
they were necessary to restore the biggest US auto maker to
profitability and enhance its competitive position, this one-time icon
of American capitalism is teetering on the edge of collapse.

GM’s announcement underscores the new stage that has been reached in
the economic crisis, which has moved far beyond the situation that
existed even two weeks ago, when the Bush administration announced its
bailout plan for the banks and insisted it was the only way to avert a
market meltdown and severe recession. That supposed panacea—designed
to cover the losses of the biggest banks and facilitate a further
consolidation of financial power in their hands—has done nothing to
stem the crisis. Nor could it, since it did not address the underlying
rot in the industrial base of American capitalism.

Now, the crisis is rapidly engulfing the broader economy, heralding a
wave of plant closures and cutbacks in every branch of economic life.

The Wall Street Journal reported Friday that the consensus of
economists it surveyed was that the US gross domestic product would
contract in the third and fourth quarters of this year, as well as in
the first quarter of 2009. “This is the first time that survey
forecasts for those periods have turned negative,” the newspaper
wrote. “If those predictions bear out, it would mark the first time US
GDP has contracted for three consecutive quarters in more than half a
century.”

President Bush made another White House appearance Friday morning in a
futile attempt to revive confidence in the financial markets. Aside
from making clear that his administration had decided to begin buying
equity stakes in order to inject more capital into US banks, he had
nothing to add to his previous remarks on the crisis.

He declared that the “federal government has a comprehensive strategy”
to resolve the crisis, without explaining the abject failure of his
previous “strategy”—the $700 billion bailout package—to stem the
financial panic.

Bush has come to symbolize the disarray not only in the financial
markets, but also at the highest levels of government. Even as he
spoke the Dow began falling, and was down more than 300 points minutes
after he finished speaking.

Summing up the prevailing attitude toward Bush and other political
leaders, Howard Silverblatt, senior index analyst at Standard &
Poor’s, said, “People are scared. Nobody believes what is coming out
of the mouths of politicians or chief executives.”

There is mounting evidence that more costly measures to prop up the
banks are under consideration, including a government guarantee for
hundreds of billions in bank debt and inter-bank loans and government
insurance for all bank deposits.

All of the proposals to deal with the worst economic crisis since the
Great Depression, whether from the Bush administration and the
Democrats and Republicans in the US, or the governments of Europe and
Asia, have one thing in common: They all proceed from the need to
maintain and defend the interests of the financial aristocracy.

None of the measures address the social tsunami that is about to
engulf the working class.

As for the multi-millionaires and billionaires who monopolize the
economy and dominate the US government, they will remain as ruthlessly
preoccupied with their personal enrichment as ever. As the New York
Times reported on Friday, a sticking point in the government plan to
purchase stock from the banks with taxpayer money is the existence of
token provisions in the bailout bill imposing certain limitations on
the pay of top executives. The Times wrote: “It is not clear,
administration officials said, that the largest American banks would
agree to this, particularly given the restrictions on executive pay.”

The events of Friday, culminating two weeks of mounting financial
crisis and a flurry of measures by governments to prop up their
banking systems at public expense, confront the working people of the
world with the prospect of rapidly rising unemployment, poverty and
social misery. They raise urgently the need for a coordinated
international socialist strategy to defend the interests of the
world’s people against the financial elites who are responsible for
the unfolding catastrophe and are seeking to impose the burden of the
crisis on the working class.