The price of American leadership is on the slide
Opinion
The London Times
June 28, 2002
America has spent most of the past decade lecturing
the rest of the world on how to run its affairs: telling the
Arabs to replace their leaders, the Japanese to
restructure their industries and the Europeans to
reorganise their societies and ways of life. Now this
hubris is making way for nemesis.
For most people around the world, the most important
event in America this week was President Bush's
speech on the Middle East. There was a chillingly
Orwellian quality to his proposal that Palestinians
should vote for leaders approved in advance by Israel
and Washington. For Mr Bush, however, this week's
Middle East challenges paled into insignificance beside
the challenges from Wall Street. To judge from his brief
appearance on TV from the G8 summit in Canada, the
accounting scandal at WorldCom aroused much
deeper emotions in Mr Bush than any event in the
Middle East - and, in a way, this order of priorities was
understandable.
The adage that "the business of America is business"
has never been truer than it is today. Washington is run
by an Administration that looks, behaves and thinks
exactly like the board of a Fortune 500 company.
What makes the collapse of US share prices especially
alarming for the White House - and therefore
especially important for the world as a whole - is that
events on Wall Street have moved from the realms of
economics and finance to politics and morality. Events
are no longer just a matter of money. They have
become an ethical and ideological issue. To see what I
mean consider Wednesday morning's news summary
column in the Wall Street Journal. The column was led
by the following six items:
"The audit panel at WorldCom (America's second
biggest telephone company) uncovered what could be
one of the largest accounting frauds ever, with the
discovery of $3.8 billion of expenses improperly booked
as capital investments."
"Prosecutors widened the probe of Martha Stewart (a
media celebrity and lifestyle 'role model') to include
possible obstruction of justice and making false
statements related to the sale of ImClone shares."
"The SEC is taking a tough stand on how Qwest
(another leading telephone company) accounted for as
much as $1.4 billion in sales of fibre-optic capacity."
"Citigroup (the biggest US bank) marketed financing
arrangements to energy firms that inflated their cash
flow, a practice now drawing scrutiny."
"The Justice Department is investigating the role of
several former employees of Greenwich NatWest in
some Enron partnerships."
"Adelphia (one of the country's biggest cable TV
companies) filed for bankruptcy protection amid probes
into some of the largest self-dealing in US corporate
history."
The significance of this epidemic of corporate
malfeasance extends far beyond the losses of well over
$100 billion already suffered by shareholders and
bankers from the collapse of WorldCom. They can be
considered under three headings - direct financial
effects; broader economic impact; and implications for
American politics and diplomacy.
The scandals are obviously doing direct damage to the
stock market and the US economy. By reducing
household wealth, undermining consumer confidence,
and discouraging business investment, the WorldCom
and other scandals will certainly slow the rate of
economic recovery and slightly increase the risks of a
second or "double-dip" recession in the year or two
ahead. But these direct effects are likely to prove rather
transient and unimportant.
For a start it is quite possible that the WorldCom
scandal will mark the low point for Wall Street. For
months, investors have been asking themselves why
share prices were persistently falling, at a time when
the US economic recovery, the improvement in profits
and the still very low level of interest rates seemed to
provide an almost ideal environment for stock market
gains. This week we learnt the answer - and now that
the news is out about WorldCom it seems reasonable
to expect a stock market recovery to begin, unless there
are even nastier financial skeletons still lurking in Wall
Street's cupboards.
Even if the stock market continues to fall, the probability
of a double-dip recession will be very small. Any
weakening of demand caused by lower share prices
can (and will) be offset by further reductions in interest
rates, even bigger expansions in public spending and
even bigger tax cuts than the whopping $200 billion
fiscal stimulus already planned by Mr Bush.
A more durable economic effect of the WorldCom and
other scandals could actually be quite benign. The
elimination of fraudulent companies such as
WorldCom and Enron should be good news for the
properly financed and honest businesses which have
been struggling against these unfair competitors for
years. Improperly financed companies such as
WorldCom, Enron and Adelphia have distorted
competition and misallocated vast amounts of capital in
important industries in telecoms, energy and the media.
Their demise should therefore be considered good
news. It is worth recalling that the bursting of the
technology bubble in April 2000 encouraged the revival
of many "old economy" companies in sectors such as
retailing, house-building and basic manufacturing.
These sectors had been starved of capital by the
technology incubus.
In terms of economics, therefore, the WorldCom and
other scandals need not cause too much disquiet. It is
when we turn to the political and diplomatic impact that
the White House, and maybe the whole of America,
have real cause for alarm. The domestic political
implications of the scandals are easy enough to define.
Washington this week has been abuzz with rumours
that the Democrats would try to turn November's
congressional elections into a referendum on corporate
America's excesses. With the Bush Administration
identified so closely with tax cuts for the rich and
"corporate welfare" for big business, a populist
campaign against economic abuses in both Wall Street
and Washington would give the Democrats a good
chance of electoral success.
Even a small swing against the Republicans - and a
swing against the incumbent party has been an
invariable rule of US politics in mid-term elections -
would be disastrous for the White House. At the
moment, political analysts in Washington almost all
rule out a Democratic victory, partly because Mr Bush's
poll ratings have remained at stratospheric levels since
September 11.
But the President's personal standing is doing his party
no good. When it comes to voting intentions in the
congressional election, as opposed to patriotic
expressions of support for the Commander in Chief, the
stalemate in public opinion today is exactly the same as
it was in the 2000 election. The polls show Democrats
and Republicans exactly neck and neck. The
congressional election is therefore wide open and the
Wall Street scandals have greatly improved the chances
of Democrats upsetting conventional wisdom, winning
control of Congress and turning Mr Bush into a lame
duck.
The possibility of a lame duck President brings me
finally to the most interesting - if farfetched -
consequences of the Wall Street scandals. By
weakening Mr Bush, discrediting the US economic
model and undermining America's moral authority,
these scandals will confirm a trend which began with
the Axis of Evil speech and Mr Bush's over-enthusiastic
embrace of Ariel Sharon. By threatening to go to war
against countries which have never attacked the United
States, and boasting about his power to dispose of any
political regimes not to his liking, Mr Bush has lost the
respect of both America's military enemies and its
allies. Now the loss of international respect for the
United States is moving a step further.
America has forfeited its global military leadership by
blustering against President Saddam Hussein and
failing to curb Mr Sharon. It has forfeited its global
diplomatic leadership by abrogating treaties on climate
change and criminal justice. It has forfeited its global
economic leadership by protecting its steel companies
and increasing subsidies to farmers. Now America is
forfeiting its global business leadership by failing to
enforce proper financial practices and ethical
standards. This loss of American leadership will
probably be the most enduring legacy of the scandals
on Wall Street.
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