Recent times have been marked with tumultuous financial happenings. Daniel Reynaud considers the implications.
Daniel ReynaudMar 20, 2023, 12:51 AM
In the last few months of 2008, news bulletins regularly featured stockbrokers in despair and investors—often retirees—grimly watching the plunging values of their investments. Markets have been on a roller-coaster, with dramatic drops, sometimes as much as 10 per cent in a day, or even in a matter of hours, often followed by rises almost as dramatic, before the renewed downward plunge confirms the rally to be a false dawn.
In various places around the world, trading was temporarily suspended to prevent panic selling from totally destroying a national economy and governments proffered various measures to prop up banks, currencies and investor confidence.
The crisis has led to attempts at international cooperation over intervention strategies and of talk of the need for a global financial regulatory system to prevent a rerun of this disaster. As I write, with up to 50 per cent already wiped off equity markets in less than a year, the bottom of the crisis has not yet been reached and by the time you read this, anything might have happened.
But even at this stage, it has been a dramatic global economic collapse that has claimed some of the world’s most prestigious financial institutions. The victims include, most notoriously, Lehman Brothers Holdings Inc, one of the worlds leading financial services firms and an institution that had successfully weathered the Great Depression of 1929 but is now America’s biggest bankruptcy case. The crisis has also threatened the economic viability of several sovereign states and badly frightened most of the governments in the world.
Some countries, like Iceland and Hungary, have taken emergency loans from Russia and the International Monetary Fund to prevent the entire nation from slipping into bankruptcy.
The free-marketeer, American President Bush, was forced to adopt financial policies of heavy government intervention in financial organisations, buying up shares in banks and other institutions.
On the smaller scale, it has devastated the lives of millions, taking away their homes, their jobs and threatening their post-working lives. After years of compulsory superannuation savings, mostly invested in the stock market, retirees and those approaching retirement suddenly find themselves with vastly reduced incomes, with their former sense of security stripped away.
By October of 2008, superannuation funds were recording an average loss of 10 per cent for the year.
Yet little more than a year ago, things looked quite rosy. The world economy looked in good shape and global stock markets had experienced a long bull run, returning double-digit profits for several years in succession. Based on the wealth of their share portfolios, corporations were able to borrow huge sums to invest in other enterprises, while booming house prices allowed individuals to put their homes up as collateral to borrow money to invest in shares.
Many were planning for a future of prosperity, with comfortable lifestyles and foreign travel.
However, with the stock market collapse, this vast wealth evaporated. People suddenly faced a mountain of debt with little capital to counterbalance it. Homes or share portfolios that had underpinned loans suffered dramatic falls in value and many found themselves owing more than their net worth.
Some have lost their homes and businesses to lending institutions, eager to minimise the risk of rising bad debt.
Nationally, the United States of America is the world’s single biggest debtor, carrying something like a US$10 trillion dollar debt, built up by extensive borrowing and huge foreign investment in US businesses. Servicing the debt is a significant strain on even an economy as large and wealthy as that of the US.
What happened to the trillions of dollars which vanished from the listings of the world equity markets? Where did that money disappear to? In a sense, it only really existed as a figment of the collective imagination. Homes that rose dramatically in value over a number of years then sagged in the last couple of years, do not intrinsically have the value of millions of dollars. Simply put, they are worth whatever someone is willing to pay for them. Similarly with shares: collectively, investors are unsure that shares are worth as much as they were selling for just a few short months ago. This insecurity has translated into much lower values, even to the point of putting once-profitable companies at risk of collapse, despite the companies still being well-run and producing goods for which there is still a market.
The internal complications of our global economic system may be beyond the comprehension of the average punter but in all its sophistication, it is still a fragile and imperfectly understood system. Economists, who felt they knew enough to prevent another global meltdown, proclaimed themselves caught by surprise by this crisis.
Former Federal Reserve chairman Alan Greenspan, the guru of self-regulation in economic spheres, admitted in October, that he had been partially wrong in his belief that deregulated free-market economies would avoid crises like the one that currently engulfs the world.
He was counting on self-interest to keep financial powerhouses responsible yet there is little evidence of this. Over the past few years, as institutions have reported falling profits or even bankruptcy, the multimillion dollar salaries and “performance bonuses” of the CEOs seem undiminished.
Greenspan’s own admission of “shocked disbelief ” shows even our most trusted financial advisors may be completely wrong on issues of such importance as the sound operation of the national and global economy.
Indeed, economic forecasters are notoriously unreliable at accurately forecasting growth, slumps and interest rate movements, yet they are regularly consulted and, apparently, well paid.
While US coins are stamped, “In God we trust,” it is clear that it would be more appropriate if they were stamped, “In gold we trust.” But gold—or its modern equivalent of a share portfolio—is proving to be a fickle saviour. Jesus, in His Sermon on the Mount, which famously overturns a lot of conventional wisdom, had this to say about having faith in money: “Do not store up for yourselves treasures on earth, where moth and rust destroy [today he might have worded this to say, ‘where stock market crashes destroy’], and where thieves break in and steal. But store up for yourselves treasures in heaven, where moth and rust do not destroy, and where thieves do not break in and steal. For where your treasure is, there your heart will be also” (Matthew 6: 19-21).
The current financial crisis has shaken the faith of many in securities the world economic system has to offer.
Perhaps it is time to explore the securities God offers. Our wealth is not really counted in dollars and shares but in investments made in loving relationships, in living to make the world a better place for others and in eternal life.
These are the kind of investments that really pay off over the long term.
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