The stock market has been exhausted as cure-all

The stock markets are sliding steadily and despondently to new lows. No one wants securities anymore. Citizens and politicians are searching for scapegoats.

Fear predominates. Everything is contracting: the economy, jobs, house prices, shares. Markets are by definition governed by fear and greed, but where are the greedy buyers now that the market needs them?

Who will buy up all the shares that international British bank HSBC put up for sale on Monday? HSBC needs 14 billion euros. The good news is that the bank does not need any money from the government. The bad news, however, is that the shares are being sold at a heavy discount. Thus the company has shrunk its own share price.

In a despondent mood, the financial markets fell below the low points of the previous decline in the past few days. The Dow Jones index fell under 7,000 points. The Amsterdam AEX index was at 202 on Tuesday, 16 points below the low point of March 2003.

But the markets are not undergoing heavy drops like in October and November of last year. More and more asset managers are waving the white flag. They don't want securities. Experts and historians say this is the start of the capitulation, an absolutely necessary prerequisite for any recovery.

Stock market cult

The stock market fall marks the end of the securities cult that had slowly but surely taken hold of the world since the summer of 1982. The stock market seemed to be the cure-all for the economy and society. Securities investments made the rich richer, but the middle class too proved it could blossom into folk capitalists. Governments were able to get rid of their state companies for phenomenal amounts.

Managers watched happily as rises in share prices inflated their remunerations and bonuses to record heights. The smartest men and women went to work in the financial world. Everyone counted on the power of stock market gains to inexpensively save up for a pleasant old age.

The economy provided the ideology for politics: lower taxes, policies that favour shareholders, low or preferably no financing deficit and a compact government. There was no one talking about any kind of ideological struggle after the fall of the Berlin Wall. Nor did the internet boom and subsequent economic decline signal any definitive break with the cult of securities.

Desperate

Now with every share price drop there are fewer assets available to put a new stock market rise in motion. New records are still being made. But they are the kinds of records that only make citizens and company managers more anxious. Who is yet able to comprehend that US insurer AIG booked a loss of 62 billion dollars and needs another 30 billion in support from the US government?

Until recently AIG was the country’s pride and joy and a logical cornerstone in any investment portfolio. US government actions to bail out banks and insurers are gradually starting to look a bit desperate.

On Friday the US government expanded its stake in Citigroup, the once so mighty international bank, to 36 percent. Every bail out action now raises the question: is it now really enough?

And the setbacks of the depression are still to come, when companies go bankrupt and banks have to write off their loans as worthless.

Scapegoats

Every crisis gets the scapegoats it deserves. And just like in the nineteen thirties, those scapegoats are the bankers on Wall Street, traders in the City of London, and directors in the Dutch financial sector. Sir Fred Goodwin, former CEO of the Royal Bank of Scotland and architect of one of the most disastrous bank takeovers in history, that of ABN Amro for 71 billion euros, is on the street, but with a gilt-edged farewell package.

The excesses of the era of earning free money lie not only in the culture of bonuses and irrationally high senior management salaries, but also in the outright fraud and swindling that is now coming to light. That too is reminiscent of post 1929, the years following the big stock market crash.

Citizens and politicians are looking for a guilty party to pay the penalty. In the Netherlands, confidence in insurers is shrinking. Finance minister Wouter Bos told international securities investors at a conference in Amsterdam on Tuesday that they too had failed. They should have kept the senior managers better in check.

In the atmosphere of fear and shrinkage, Warren Buffett, the most famous American securities investor, paid something of a penalty last weekend as well. He has lost vast sums, but remains confident in history: America and shares always rise again. Buffett refuses to capitulate.