The Boomerang Economy
By David Ignatius
Washington Post Columnist
Friday, July 12, 2002
PARIS -- An investment banker who has probably moved trillions of dollars in and out of financial markets in his lifetime confided recently that he was waiting for a "real" blowout, with the Dow collapsing to 6000 and the dollar evaporating to $1.15 for a measly euro. Then, he said, he was going to put every penny he could raise into the U.S. stock market.
It's no wonder, given the behavior of people like my investment banker friend, that financial markets always seem to overshoot realistic price levels, on the downside as well as on the upside. Driven by the volatile expectations of investors, markets move in stampedes rather than the orderly flows described in economic texts. Let's call this the "boomerang economy," whose operating principle is that what goes around comes around. So perhaps it's inevitable that the "irrational exuberance" of the late 1990s has given way to what I find an equally irrational pessimism today.
What's ailing Uncle Sam? The economic fundamentals for America look solid enough. The U.S. economy grew at a gee-whiz 5.8 percent rate during the first quarter, and at a respectable 2.5 percent or so clip during the second quarter. Inflation is low, consumer spending has remained strong and productivity keeps growing. A Wall Street Journal survey this month of 55 economists found a consensus forecast that the U.S. economy will grow at a 3.5 percent rate in the second half of 2002 and a 3.6 percent rate during the first half of 2003.
So what is Wall Street's take on all this good news from Main Street? Head for the hills! The Dow closed yesterday at 8802, down from Monday's 9275.
Yes, yes, there's the steady beat of stories about financial scandals, which begin to make you wonder whether the whole of the U.S. economy is one big Enron scam. But a sensible person shouldn't wonder about that for very long. The fact that greedy executives at go-go companies were playing games with their numbers during the recent Gilded Age cannot be surprising to students of human nature. And it certainly shouldn't overrule the evidence in front of our noses of the strength and durability of the real U.S. economy.
And yet daily the financial panic spreads, as if this is some sort of general crisis of capitalism. Perhaps now Americans have a better sense of what it feels like to be an Argentine, or a Thai, or a Turk -- and feel that your economic livelihood is at the mercy of capricious financial markets and mendacious crony capitalists.
What's confounding is how far and fast the pessimism is spreading. At a gathering of prominent European investors here yesterday, the bad vibes were positively contagious, as speakers warned that Enronitis could easily spread to Europe.
Indeed, you could argue that it already has: So far this year the CAC 40 index of French stocks is down 23 percent; the German DAX index is down 20 percent; the British FTSE 100 is down nearly 18 percent; and the Stockholm OMX is off 32 percent. The Dow, by comparison, is down "only" about 13 percent this year.
What's going on? Has Osama bin Laden become a short seller?
When economists can't identify the variable that is causing a change in economic conditions, they sometimes refer to an "X factor." It seems increasingly likely to me that the X factor in the global economy is the performance of George W. Bush and his administration. For some reason, the administration has behaved as if its purpose was to cause investors to lose faith in the dollar and the U.S. economy.
What would you say about an administration that issued near-daily warnings about mega-terrorist attacks; abandoned free trade for short-term political reasons; maintained a daily drumbeat of stories about its vague plans for toppling Saddam Hussein in Iraq; had a president who was touched by the same sort of financial legerdemain he so portentously criticized in others; let the budget deficit swell back toward its 1980s levels; and tried to stanch the financial crisis of confidence with a limp speech that made even members of Congress look visionary by comparison.
You'd say that such an administration would have difficulty maintaining the confidence of investors. And so it has come to pass.
In the end, financial markets are about trust. When it's there, they prosper; when it disappears, they begin to wither and die.
That essential trustworthiness built the first banking fortunes. Extended families such as the Rothschilds and the Lazards could move money around the world because they trusted each other. Their word was their bond.
Trust and the confidence that flows from it remain the bedrock of economic growth. And the problem with trust is: It's so hard to accumulate, and so easy to fritter away.
© 2002 The Washington Post Company
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