Photo by reubeningber A frantic dollar bill

This is predictable to a point, but the chickens are stampeding a lot more often than usual. In many cases the markets take the line of least resistance, which is to bail out and see what happens. Stock market investors, for some reason, aren’t keen to spend another month getting battered with 4% losses every other day. The other part of this process is the option to get out, get the cash, and use the money for something more productive, or to reposition portfolios. That’s the rational approach, and it’s a bit better organized than it looks. In many cases it’s also a result of automatic selling, which is a sale at a profit if the stock falls to a certain level. The price triggers an automatic sell order. It’s so common that it’s been a feature of many recent big falls since 1987. Sellers get out with their skin, or most of it. Less fortunate are the index-based funds and superannuation funds. The Dow is now below 10,000. At its most recent peak it was 14,000. So people who bought in at the peak aren’t doing too well. They’ve actually lost quite a bit of money, and longer term investors have either remained static at roughly 2004 levels or gone slightly backwards. The New York Times and Bloomberg have various snippets from the windswept prairies of the NYSE and other blasted heaths: The New York Times:

The Dow has lost more than 1,100 points — or about 10 percent — in slightly more than a week. The S. & P. has lost more than 15 percent in the same period.

The sharp slides came despite more reassurances from President Bush and a morning announcement from the Federal Reserve that it would significantly expand the amount of money it made available to major banks. The Fed will now lend up to $900 billion in credit, an enormous sum that officials hope will reassure banks that the government will provide them with adequate capital.

Bloomberg

Money market rates climbed as investors lost confidence in financial markets. The interest rate that banks charge each other for overnight loans in dollars jumped to 2.37 percent from 2 percent, the British Bankers' Association said.

Yields on overnight U.S. commercial paper jumped 0.94 percentage point to 3.68 percent, according to data compiled by Bloomberg. That's the highest since Sept. 30, the day after the U.S. House of Representatives first rejected the bank bailout.

Commercial paper is the term for short term loans to business. The rate is climbing, which means the inevitable rise in rates is now coming. Lack of capital for lending means lenders charge more. It’s also a form of risk coverage. Rate rises will slam on the brakes in the most unambiguous way, and further slow the economy. The US economy has been living with extremely low rates for nearly a decade, when they were used to stabilize the markets and bring some reassurance into them. Now, however, even if the central banks are lending at low rates, low rates aren't viable in the commercial lending sector, which needs cash, and a lot of it, in order to be able to borrow itself. So lenders have to raise their own rates, to cover the rising rates of their own lenders. Years from now, it what will be a fundamentally changed financial sector in the global economy, people will wonder why all this happened. They’ll also wonder why the markets couldn’t see the obvious: Unless they’re all proposing to retire in the next week or so, they have to trade their way out of this. The fact is that for all the much-hyped complexity of the markets, they’re on a self-inflicted treadmill. Lending to raise capital to borrow more to lend more. It’s a sort of Idiots’ Utopia, when it works. They make big money from other people’s money, and milk and honey flow into empty brains which see executive packages as the be all and end all of personal achievement. This is the grisly fact of the markets created in the 80s, and they’re well past their expiry date in a global economy driven by some very tight margins. Even at rock bottom, babysitting-level rates of borrowing from central banks, the system has just keeled over through bad business and bad economic calls. This method just doesn’t work any more, and monetarism, the Great Revelation of the 80s, is now on its way to the rendering plant. It’s a one trick wonder, a flightless bird with no defences when the markets go sour. Interest rates have become the only method of market and economic control, and shall we tentatively say that "control" isn't the word for the current situation. Interest rates are serious limitations on capital flexibility. This proves one thing: “Live by interest rates, die by interest rates.” Much of these huge amounts of borrowed money never made it to real business, or actual product. They were created by the lending markets, mainly to pay for the lending markets. It’s not like every million borrowed was used for business purposes. A lot of it was sucked right back up in repayments, fees, executive packages and other non-products. So were the big profits many companies have been using to drive their stock prices. That’s easily proven by the state of the industry sectors. If all that money had been used for business, the businesses would be bigger, and in much better shape in terms of capital. So all the “great figures” we’ve been hearing about for years in terms of corporate profits have been largely illusory, in terms of real capital available for doing real business. This is in some ways the capitalist equivalent of the fall of the Soviet Union, falling to bits under its own unworkable practices. The markets will stagger on until they run out of disasters. In one sense this series of abandon ship maneuvers on the stock market is actually good news, because people are getting out with some money, not waiting until they’re wiped out. They may even be able to open corner stores. When the nukes stop falling, what’s left will be a drastically different financial market, with some very ugly memories and a road map of how not to operate a global economy.