Tumbling bourses

Nothing, it seems, can stop the decline in stock prices across the world’s key markets, from the United States to Europe and the Far East. The Dow Jones industrial average is down to its 1997 level, the general indices of Europe’s major markets are sliding at 1996 levels, while the Nikkei stock index has plunged to its 1985 level. The problem is that not only are there no prospects for steady and long-term recovery but also the painful consequences of the dramatic reduction in the firms’ stock market prices have begun to have a direct effect on their economic power, creating a vicious spiral of downward pressure. Bank and insurance giants play a special role in this process. As the most essential institutional investors, the collapse of stock prices has caused a serious reduction in the value of their portfolios, resulting in a fall in their own stock prices, and in turn, reinforcing the overall downturn of the markets. These developments prevent banks from aiding the debt-laden companies. As a consequence, there has been an increase in the number of bankruptcies, entailing losses for the insurance sector, which sees its capital base crumbling. Furthermore, the collapse of artificially inflated stock prices worldwide and the end of cost-free funding by investors revealed huge organizational and managerial flaws in a large number of firms – including some of the world’s giants – not to mention many cases of blatant fraud. There is much talk globally over the need to adjust, or to even radically transform, the role of the state – and rightly so. It is clear, however, that apart from the – virtually endemic – stock market crisis, there is also the issue of refashioning the framework of principles which underlie the companies’ operations. We are now witnessing the devastating repercussions of the private sector’s attempt to base growth on the fragile foundations of the lavish, cost-free funds supplied by the stock market frenzy from 1998 to 2000 as well as its failure to invest this capital in a prudent and profitable fashion. The revenge of basic economic principles has left behind a large number of victims and it should, at least, prompt an effort to wean firms off the intoxication caused by what Federal Reserve Chairman Alan Greenspan once famously called a climate of «irrational exuberance.»