.WAFL (l#A&@D7v YSЏ{Uantry(xѧS}'/E.U7v YSЏ{Ua`curl =http://www.smh.com.au/articles/2002/06/30/1023864682532.htmlmime text/htmlhvrsdata World shudders as greed is good bubble bursts - smh.com.au
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World shudders as greed is good bubble bursts

July 1 2002


They haven't caused a crash so much as a crisis of confidence, and for that the frauds and crooks must pay.

If you believe Adam Smith was a phoney, that capitalism is a fraud, and the stockmarket is a casino, now is your chance to say so. One of the great speculative manias of all time is in an advanced stage of collapse and its consequences will be with us for several years yet.

So far, only investors, a few city workers and those goatee-bearded dot-commers have felt the impact of shrivelling shares. But we are in the third year of a bear market, a performance unseen since the 1930s, and soon the draught will be felt in the real economy. Companies must rebuild profits and restore their balance sheets. As we saw at WorldCom, that will mean job losses.

No doubt some academics, pundits and left-wing rabble-rousers, playing on fears that the system doesn't work, will take advantage of the situation and question the very values and institutions upon which the world economic system rests. After all, these characters have been on the defensive ever since the fall of the Berlin Wall, when the more excitable capitalists boasted history was over and claimed they had won.

If you are one of the 17,000 losing their jobs at WorldCom, you might listen to the malcontents. Some might even dust off their old copies of Das Kapital and say it would be better if the economy was centrally planned and run by "experts".

But those of us who believe in markets must not be cowed. The first thing to realise is that markets are not perfect. They merely represent the accumulated view, or collective wisdom, of thousands of people and are the least bad way anyone has come up with for matching supply and demand.

However, like anything dependent on human nature, they can fall victim to humours and passions, such as greed and fear. As Winston Churchill said of democracy, capitalism is the worst system imaginable, apart from all the others.

Rather than the markets failing, they are working.

With the benefit of hindsight, we can see that the bull market of the Bill Clinton years and the first term of Britain's New Labour, when shares kept going up, was just a bubble in which huge amounts of capital were misallocated on wasteful enterprises, notably those based around the Internet. There is, for instance, enough fibre-optic cable to go round the world 40 times, and yet only one-tenth of it is in use.

Collapsing markets are about dismantling that elaborate superstructure of overinvestment, so unprofitable enterprises close, capital is reallocated and growth begins again.

This is what the economist Joseph Schumpeter called creative destruction, a process every entrepreneur has to live with. The market is certainly signalling economic difficulties, but we are not facing a systemic collapse as during the 1930s. Then, the situation was aggravated by worldwide tariffs, strikes, and communist and fascist governments in Europe.

Britain's Chancellor, Gordon Brown, might be gumming up the economy with taxes and regulations but even he is not that bad. And the National Front's Jean Marie Le Pen lost the French election.

So if the system isn't the problem, what is?

The answer is that just about every one of the recent problems to hit financial markets has been caused by individuals acting incompetently, fraudulently or dishonestly.

The comparison is not so much the 1930s, but the beginning of the 20th century, when millionaires such as Vanderbilt, Rockefeller and Frick emerged in America. We, too, live in an age of robber barons. They are the greedy chief executives, bankers and accountants, some of whom have lied and cheated, misled investors and looted companies for their own benefit. "What do I care about the law. Ain't I got the power?" the steel magnate Vanderbilt once said. That is just the attitude we have seen during the tech boom.

It starts right at the top, with Alan Greenspan, chairman of the US Federal Reserve. During the Asian crisis of 1998, the venerable central banker began to play the market. Every time stocks fell, he puffed them up again with an interest-rate cut, inflating the bubble further. Whenever things went wrong, such as the Russian default, or the hedge fund Long Term Capital Management going bust, or September 11, he responded by cutting rates.

Investors became used to shares going up, rain or shine. Instead of asking questions, scrutinising company accounts or doubting the bizarre claims of the so-called New Economy, investors became complacent and credulous.

Uncle Alan blew money into the system and just inflated the bubble further.

Nobody is questioning Greenspan's honesty, or even his good intentions. He just got it wrong. That is more than can be said for many of the players on Wall Street and in the city who inhaled his heady gas and became delirious on the vapours.

Arthur Andersen's, the accountants, have already been found guilty of obstructing justice by shredding documents as the energy trader Enron collapsed.

The market is taking its revenge on those it cannot trust now that the authorities are also acting. They should not hold back.

The events at WorldCom are a case in point. The company was booking routine running costs as capital expenditure. That is seriously misleading, and allowed profits to be exaggerated. No doubt the FBI, Congress and the Securities and Exchange Commission will be coming after Scott Sullivan, the chief financial officer, and Bernie Ebbers, WorldCom's founder, just as they have come after other fallen barons of Wall Street, such as Kenneth Lay and Andrew Fastow of Enron, or Henry Blodgett, the analyst at Merrill Lynch investment bank who put buy recommendations on Internet stocks he privately described as "junk". Even Martha Stewart, the apple-pie American icon, is facing an insider-dealing probe.

The greed is not confined to Wall Street. In Britain, Sir Chris Gent, chief executive of Vodafone, has just been awarded a pay package that could make him 12 million ($32.6 million) despite the collapse in his company's shares. That is unseemly and, as far as investors are concerned, he is now a Gent only in name.

Rose Marie Bravo, the chief executive of Burberry, which is trying to float on the stockmarket, will receive a 10 million cash payment, even if the shares plunge. That is, frankly, outrageous.

We are facing not so much a crash as a crisis of confidence. Those responsible must fall on their swords, or be brought to book.

George Trefgarne is the economics editor of the Telegraph, London.

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