Is shareholding democracy a recipe for disaster?
New York seems to be full of Cassandras right now – people predicting the imminent collapse of the market but fated not to be believed. So it came as a bit of a shock to meet a real Cassandra – especially since I had been told her name was Linda when we met.
‘Well, I was christened Cassandra Linda,’ she explained when I looked confused after an old friend of hers had called her Cassie. ‘But when I became a market analyst, I thought it wasn’t entirely appropriate so I decided to use my second name.’
I wondered if she hadn’t over-estimated the extent of classical scholarship among the financial community. I looked round the after-work crowd in the bar off Wall Street where I had been introduced to her. For most of them, Troy might be the Dallas Cowboys’ quarterback or a city somewhere on the way to Canada. But Priam’s daughter clinging to the statue of Athena with the city in flames around her didn’t seem to be an image that would spring readily to their minds.
‘So when will the market crash?’ I asked the prophetess. In the style of oracles since time immemorial she went into an obscure and lengthy circumlocution which didn’t seem to answer the question.
But then she came out with a surprisingly firm prediction. ‘When the market does turn down, things are going to be bad. Real bad.’
‘Why?’ I asked.
‘Well, so much of personal savings is now invested in mutual and pension funds. And retail investors don’t really understand risk. So how are they going to react when the market dives? They’re going to pile out of the funds, driving prices even lower. That’s what they’re going to do.’
‘But that wasn’t what happened in 1987,’ I suggested. Linda/Cassie looked at me as if I were a veteran droning on about Vietnam. Like most of the people in the bar, she seemed far too young to have been around eleven years ago.
‘When the market suddenly lost a twelfth of its value, private investors mostly held onto their mutual funds and equities,’ I intoned. ‘It was the institutions that were the main sellers in 1987.’
She treated this piece of ancient history as though it had as much relevance to today as the Trojan Wars.
‘Well, even so,’ she went on, ‘if they don’t become sellers, people are going to see the value of their assets tumble. And because people tailor their spending to real or apparent changes in their personal wealth, they’re going to spend less. Result? Major recession.’
‘It’s obvious,’ she continued. ‘Sophisticated institutions have better information than individuals. So they’re less likely to follow the crowd in either boom or bust.’
‘Institutions may have better information but that didn’t stop them getting it wrong over Asia,’ I riposted, and ordered more drinks to assuage the oracle. ‘And don’t fund managers take a tumble because they follow the crowd by piling into so-called hot stocks? That doesn’t suggest a high degree of sophistication to me. Perhaps people do understand that equities fluctuate – and even crash – but in the long term they offer better returns than other forms of savings.’
‘I can see, we’re not going to agree on this,’ Cassandra Linda said.
‘No,’ I answered. ‘And that’s not just because I know your first name.’
‘Then why?’
‘Because if you’re right, the implications are horrendous. People are going to get fed up with their wealth taking a roller-coaster ride. So they’ll call for government regulation and even intervention to stabilize the markets. And then where will we all be?’
Our conversation ended there, with a rhetorical parry my oracle could not answer, not because there was nothing more to say but because the buzz in the bar had become so loud that it was impossible to hear or be heard. It wasn’t alcohol; apart from me, hardly anyone was drinking seriously. It was just people winding down after a hard day working at trying to beat the market.
No-one ‘recklessly drank til heavy of brain they grew, til rolled their fluctuant eyes.’ No mouth ‘babbled the drunkard’s broken words.’ To no-one ‘the very roofs and walls seemed as they rocked.’
That was how Quintius of Smyrna described the behavior of the Trojans the night before the city fell. Maybe we shouldn’t start to get worried until those on Wall Street turn to the booze.