A new London Times editorial...
The price of American leadership is on the slide
By anatole kaletsky
The London Times
June 28, 2002
timesonline.co.uk
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. |
