SocialismToday           Socialist Party magazine

Issue 73, March 2003

Stock market fall hits millions

BY THE end of January 2003, the FTSE 100 index had fallen to half its peak value reached at the end of 1999. The FTSE All Share index was below its 1969 level in real terms.

David Schwartz, a stock market historian, points out that in the previous 100 years, stock markets had "come down by 50% only four times": between 1937 and 1940, with the threat and beginning of war; in the depression era of 1928 to 1932; in the post-war crisis of 1920; and in the crash of 1972-74, brought on by rising inflation, the end of the world economic boom and the first world oil crisis following the Arab-Israeli war of 1973.

Although there has been a small revival since January, the markets are still in the doldrums. In the 1990s, TMT stocks (technology, media and telecommunications) were massively overvalued as investors believed that a ‘new paradigm’ was underway, in which new technology could spur perpetual gains for the world economy. Speculation ran rife as companies in these sectors gained share values greater than established companies before they had even made profits. Such a situation could not last and this ‘dotcom bubble’ burst spectacularly.

Just like the railway mania of the nineteenth century or the South Sea Bubble of the eighteenth, there was no substance behind many of the floatation’s on the stock markets. As a result, not only were the TMT stocks massively marked down but their fall caused a generalised lack of confidence in the world stock markets. This coincided with and fed into the downturn in the world economy and the revelations about falsified accounting and major collapses such as those of Enron and WorldCom.

As a result, huge crises have developed in institutions that millions of people thought were safe and impossible to fail. The myth of ‘popular capitalism’, eulogised by Thatcher in the 1980s and accepted lock, stock and barrel by Blair, Brown and New Labour, was that everybody could buy into the stock market and get rich. Those false promises have turned to dust. Even at the height of privatisation mania, most shares were held by big institutions: pension funds, insurance companies and unit trusts. Now, these institutions are under stress and strain, and the majority of people are suffering the consequences.

The futures of billions of lives are at stake because of the casinos that are the world stock exchanges. Savings, pensions and incomes have all been affected by the colossal fall in the value of stocks and shares. Ordinary people, tempted by the hype that surrounded the stock markets in the 1990s, formed share clubs or invested via the Internet. Most of these clubs or individuals have lost much of their investment.

Insurance companies have been desperately selling shares to maintain their ratio of 104% of assets to liabilities, a regulatory requirement. So bad had the situation become that the Financial Services Authority (FSA) relaxed this figure to help out distressed companies. But these same companies have been hitting their customers hard. Standard Life, the insurance company, slashed payouts to over 2.3 million policy holders in February by up to 24%. These unlucky savers are poorer because of "one of the greatest risks ever taken on the stock market - a £30 billion gamble that failed", wrote Bill Jamieson in The Scotsman. For years Standard Life was "one of the most pro-equity investors of all the insurers, with a well above average percentage of its with profits funds invested in shares. The gamble has failed spectacularly".

Successive governments have urged workers to make private plans for their old age, to invest privately or with their employers or both, as the value of the state pension has dwindled. But even these provisions are no longer enough. Professional services firm PwC say that the combined value of the state, occupational and private pensions will only be worth a quarter of average earnings in 2050. So the current generation of teenagers can expect to have pensions at the same real value as 1974, when the elderly hardly lived in the lap of luxury.

The pension funds of the UK’s largest 100 companies have a £85 billion hole in them because these funds invested much of their income in shares. The collapse in share prices will impoverish the workers contributing to these funds. And this hole has opened up in little more than a year! Charles Cowling, of pensions consultant Mercer, says that many companies cannot meet their liabilities: "Current solvency is too scary to even think about", he says. For some companies the fall in shares and their liabilities puts them in an impossible position: for example, ICI shares are valued at only one third of its pension fund! This crisis has forced many trade unions to consider strike action to defend the value of pensions, as employers worsen provisions for employees.

But the bosses have not suffered because of the stock market crash. For example, Iain Lumsden, chief executive of Standard Life, is promised a pension of £208,000. Richard Harvey of Aviva, the insurance company, had £978,000 pumped into his pension fund in 2001, guaranteeing him a pension of £342,000 a year! And tougher economic conditions have prompted a surge in dishonest activity. The value of convicted frauds over £100,000 almost trebled last year to £717 million, an annual figure exceeded in the last 12 years only in 1995 due to the BCCI scandal.

Many City figures have little optimism for the future, at least for the short term. "The cult of the equity may well be dead... at least for now", said one City pundit. ‘Alternative investments’ have become more popular; as well as gold and other precious metals, traditional safe havens in times of crisis, fine wines, art and antiques are also in vogue. According to a study from the London Business School, the FTSE 100 is unlikely to claw its way back to its top level until at least 2018! World stock markets have fallen by £8,000 billion but this was only the third worst crash in records. "It is worth reminding ourselves that things are not so bad that they couldn’t get worse", said Professor Elroy Dimson. With war and recession on the horizon, that is a distinct possibility. What is needed is not just an end to the cult of the equity but the rule of its system over the millions whose lives are just a gamble for the speculators.

Kevin Parslow


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