First the Hype, Now the Pain
Market's Fall Was Both Predictable and Predicted
by Dean Baker
In the last two months, people have begun asking whether the intelligence agencies had the information,
or should have had the information, needed to prevent the Sept. 11 attacks. It is an appropriate
question.
It is also a question that should be asked about two other disasters that have done enormous damage to
the nation: the crashing stock market and the plummeting dollar. This week's reports of fraudulent
accounting at WorldCom make this question all the more urgent.
As a result of the stock market plunge, millions of workers, who had looked forward to a comfortable
retirement, have seen much of their savings evaporate. They will have to either delay their retirement or
get by with a far lower standard of living. Millions of other families lost much of their children's college
funds. The dollar's decline will also whack the economy in ways that are just beginning to be seen. Most
important, it will make it more difficult for the Federal Reserve Board to boost the economy from its current
slump, thus keeping the unemployment rate at high levels. Unlike the Sept. 11 attacks, there is no
question that the financial disasters were foreseeable--a small group of economists tried to warn the
public about the dangers of an inflated stock market and overvalued dollar. Unfortunately, we were a
small minority that was largely ignored. Most economists were happy to celebrate the stock market and
dollar bubbles as good news.
Politics played a large role in the story, and the blame is bipartisan. The Democrats under President
Clinton were happy to take credit for the nation's prosperity at the end of the 1990s. Although some of
the prosperity was real (e.g., the lowest unemployment rate in 30 years), the bubble part of it was not. But
there was little political value in calling attention to this fact. The Republicans did not want to burst the
bubbles because the illusory prosperity provided the revenue to pay for their tax cuts.
Recognizing these bubbles didn't require great insight. For example: To see the story of the stock market,
imagine that there is a government bond that pays $5 interest every year and has always sold on the
market for $100. This means that the bond pays a 5% return. Now imagine that the price of the bond has
been bid up to $200. Since the bond still pays just $5 a year in interest, the return will have fallen to
2.5%.
Unless people are willing to receive a much lower return on this bond than they had in the past, the $200
price will not hold. To escape this logic, profits would have to grow far faster than any serious economists
projected. Even the accounting scandals now being exposed were both predictable and predicted.
In a world in which investors are willing to believe unreal numbers, it is inevitable that some will seek to
profit by deliberately producing their own unreal numbers. But the country did not have to be taken in.
Unfortunately, the economists acted like the accountants at Arthur Andersen and said exactly what those
with money and power wanted them to say.
The reporters who cover these issues, with few exceptions, acted just like the business reporters who
repeatedly named Enron one of the nation's top companies: They celebrated the bubbles.
Similarly, "strong dollar" became a mantra, with few showing any recognition of its implications. In short,
the people with responsibility, who should have known better, completely failed in their jobs.
But one feature of the "new economy" seems likely to hold through this disaster. The people on top,
those who were most responsible, will survive relatively unharmed by the crashes.
Few economists, economic reporters or market analysts are going to find themselves either out of work or
facing poverty in their old age. That fate will be reserved for the people who listened to their advice.
Dean Baker, the author of "Double Bubble: The Over-Valuation of the Stock Market and the Dollar"
(Center for Economic and Policy Research, June 2000), is the co-director of the Center for Economic
and policy Research (www.cepr.net)
Copyright 2002 Los Angeles Times |
