Over the past couple of days the indices which describe sharemarket volatility have shot down nearly six per cent and then bounced back a couple of per cent. The six per cent fall is the equivalent of a year’s earnings lost in a day. The bounce back is several months’ earnings gained in a day.
The volatility has not been as sharp as the big falls in the crashes 1987 or 1929. That is largely due to the extra knowledge around now. Further, Australia has the largest proportion of its population as share-owners in the world. Both of these factors have helped stability. When you have a very large number of people with small share-holdings, there is less likelihood of panic. Many of those people take less interest in daily share movements. There is also less at stake for them. So they tend not to trade vigorously. They are happy to leave their shares alone for a sell-off down the track which is related to personal circumstance rather than market circumstance. Moveover, a lot of the wider share-owning public are more interested in dividends than capital appreciation. In this climate, the speculators tended to congregate around the hi-tech stocks and two markets developed – an exceptionally volatile hi-tech market and a stable blue chip market. The hi-tech market took a pounding as the speculative bubble burst and the blue chips remained fairly stable.
The wider share-ownership nowadays is much different from the heady days before the 1987 and 1929 crashes. In the earlier crashes people bought everything and anything. The privatisations, demutualisations and floats of the 1990s, however, went to a more discerning clientele, one that was willing to learn a bit. They did not speculate hugely, nor did they take profits quickly. . Also, more powerful computers have made it possible for companies to have very large share registries of small share-holders and the competitive influence of internet trading has brought down the cost of transactions, once again resulting in more shareholders with smaller holdings.
Of course greed and fear still drive markets, but their influence is more diluted now. Without the millions of Mums and Dads shareholders and without the ability of lots of small shareholders to trade, it is likely that greed would have driven the market even higher this cycle and that fear would have caused it to fall much more. The market is not driven as much by eager and anxious people with fortunes at stake. This is a healthy development. It is important for governments to encourage wide share ownership. They should ensure transaction costs stay low. They should also privatise the remaining large commercial assets in public hands to as wide a group as possible.
Prime Minister John Howard has softened his view of the power of the market in recent days. He has acknowledged that he Government needs to play a greater role and that the “”trickle down” effect fondly embraced by former British Prime Minister Margaret Thatcher and former US President Ronald Reagan has not worked as well as it should. However, he should not underestimate the importance of the market. Wide share-ownership has had the double benefit of spreading some of the fruits of capitalism and has helped iron out some of the volatility in the market that can have a destructive effect on wealth generation.
AND BRIEFLY . . . ACT Legislative Assembly Speaker Greg Cornwell should get off his high horse and allow dissenting report of the committee of the Assembly that looked at the draft Budget to go public, despite his feat that it might be defamatory of Treasurer Gary Humphries. Even if the report does not have statutory privilege, it would have common law privilege. That matter should be clarified by appropriate legislation as soon as possible. In the meantime, the work of the Assembly should be done in public. In any event, is Gary Humphries seriously going to sue either the Assembly, Mr Cornwell or any other MLA over political point-scoring in an Assembly report.