Capitalists first acquire wealth then scruples

I've been watching a series on BBC2 over the last few weeks called The Mayfair Set. It charted the rises and falls of the British economy over the past 30 years and of the captains of industry that made the headlines at the time.

The series finished on Sunday with the narrator giving an insight into the transfer of power from politicians to the markets over the period in question and, more particularly, the last few years.

It was hard to know if the programme-makers approved or disapproved of this perceived shift. I have my doubts whether things have changed as much as people think - power has always resided in whoever wields the most money and that was as true 200 years ago as it is today. Then, the right connections were essential to get lucrative contracts and to load up the coffers. What's changed in all that time? Nothing.

Much of the nobility of the day - the only people in the late 1700s who were in a position to make money - also had friends or family in government. The politicians who awarded them the contracts were, in turn, rewarded with handsome shareholdings.

The only thing that's different now is that each individual economy is less sheltered from the global economy, given the freedom of capital flows, and politicians are supposed to reveal any outside interests that they have.

One of the most interesting comments made during the series was that, in the last decade, politicians demanded quid pro quos for anything that they did. Cash for questions. Cash for no questions. Directorships. Whatever. And, according to the interviewees, this was because those in power were not in a position to make lots of money themselves and this was the only way they could increase their incomes.

It was also interesting to see how the industrialists preached the gospel of philanthropy once they'd made money and got a bit older.

James Goldsmith was pictured, a few years ago, lecturing about the disaster of unemployment - this was a man whose main interest in business was asset stripping, the end result of which was generally mass redundancies. Goldsmith worried, too, about capitalism.

I often wonder why it is that people who have made the most out of a system then begin to rail against it when others begin to use it to even greater advantage.

It was all blamed on the expectations of shareholders. In fact, shareholders were accorded the sort of respect normally given to speculators. It was as though shareholders were nebulous beings who swooped in to scoop up large amounts of risk-free money.

I wonder how the new holders of Telecom feel about being lumped into the "uncaring, money-grabbing, greedis-good" category, but that's how you're nearly always portrayed if you're a shareholder.

Unless there's a bit of trouble at an a.g.m. in which case you're a dissident probably standing up for the "small shareholder".

Shareholders want the same thing, big or small. They want the value of their investment to go up. So how many Telecom owners are now going to say "don't give us dividends, hand over the cash to the government instead".

The shareholders that came in for most flak on the TV programme were the pension fund managers. Once again, it blithely ignored the fact that pension fund managers get their money from people.

I'm not entirely convinced that the vast majority of the population would say that they don't want the best possible pension at retirement age. . . if your pension is shaping up to be significantly less than your next door neighbour's, you're going to change fund managers, aren't you?

When you get down to it, this vague concept of the market is based on a notion that it is an irresistible force about which we can do nothing. As long as people measure their happiness and wellbeing in monetary terms, markets will move to accommodate that measure.

If we all decided that money wasn't important, then the markets - made up as they are of individuals - would be very different.

Most people I know would like them to be a little different right now. Bonds have been slaughtered over the last couple of weeks because of the possibility of a hike in rates in both the US and Europe. If you really want to see where power lies, it's in the desk drawer of the Fed chairman, Alan Greenspan, who's every comment is analysed and analysed again to shed light on the possible move from the Fed. We actually got a piece of research which tried to read something into the number of times he said "nevertheless" in his most recent speech.

Anyway, Greenspan certainly seems to want to put the brakes on the Goldilocks economy. His plans were thwarted a couple of years ago with the crises in Asia, Russia and Latin America. Had they not happened, it's likely that US rates would be higher than they are now. And so, with stability coming back into those regions (if you ignore Boris Yeltsin's almost quarterly prime-ministerial sackings) Greenspan probably feels as though he can look a little more closely at the US domestic situation.

The Fed still thinks that the economy is running ahead at an unsustainable pace. He takes on board the changes that technological advances have made and that makes him a bit happier about things, but they're running out of workers and wages are starting to creep up.

Spending in the US is high at the moment and a lot of that spending is courtesy of the gains that people have made on the stock market. Greenspan still thinks that stocks are too high. His juggling act is to tighten the economy enough not to send the Dow into a tailspin. Lower isn't a problem for him - it's how much lower, how quickly is the thorny question.

Interestingly, the Nasdaq, the exchange on which most Internet stocks trade, has plummeted over the last two months. From a high of 2864.48 on July 16th, it opened the week at 2545.

I know I blow the trumpet of doom on Internet stocks quite a bit but I can't help it. If you put money into a company (making you a money grabbing shareholder) that has yet to make a profit, you're making a big gamble on future economic conditions and your company's ability to ride the wave. You're probably also using the well known "bigger fool" theory - that someone, somewhere is foolish enough to pay even more than you. So far, the theory has worked perfectly. But it may be coming apart at the seams.

Amazon.com was down from $210 in April to $85.5 on Monday. E-Bay, the online buy and sell company, was trading at $215 in April. It's now at $79. Holders of the search engine company Yahoo might feel a little more complacent - their stock is only down from $219 to $121.

Plus ca change and all that sort of thing. . .

Sheila O'Flanagan is a fixed income specialist at NCB Stockbrokers