The costs of incompetence
--second half of article below
On the Democrat side, the most potentially costly example of incompetence is Senate Majority leader Tom Daschle's recent discovery of agriculture subsidies. Not only do they impose costs on the poor to reward primarily large agribusiness, but if enacted, they are also likely to derail the very fragile Doha, Qatar, round of trade talks, thus increasing the probability of a Smoot-Hawley type protectionist spiral and a prolonged world depression. Daschle, if he persists, has the chance in a late run to take the title from Lay and Schrempp of "Most expensive incompetence of 2001."
Even if Daschle wins 2001's title, however, it is likely that the true winner in the costly incompetence stakes, for not one but two egregious avoidable errors, will remain in our lifetime Federal Reserve Chairman Alan Greenspan.
In December 1996, when the Dow Jones Industrial Index was at 6,400, Greenspan, displaying not exceptional prescience but simply an experienced trader's sound feeling for long-term price relationships, decried in a speech the market's "irrational exuberance."
An ordinarily competent Fed Chairman then would have tightened money supply sufficiently to check the market's exuberance and prevent a speculative bubble from growing. After all, it was previous Fed Chairman William McChesney Martin who said the job of a Fed chairman was to "take away the punchbowl just as the party gets going." Here, surely, was a party that was getting too boisterous, here then was a moment at which the Fed should have made the partygoers switch to lemonade.
Greenspan did not do this. The result was a stock market boom in which $97.4 billion was raised in Initial Public Offerings in 2000, almost all of which are now at heavy discounts if they trade at all and in which, 20 months after the peak and (by the Wilshire Index) 30 percent off it, the S&P 500 is still trading on 27 times current earnings, with earnings expected to decline in the next two quarters. The "wealth effect" of the stock market bubble led to hundreds of billions of dollars of misallocated capital, and trillions of dollars of unwise consumption, for all of which we will be paying for several years yet as the stock market staggers downward toward equilibrium levels.
Compounding his mistake, in 1998 Greenspan arranged the bail-out of Long Term Capital Management, an arrogant but marginal "hedge fund" that had run up $3.5 billion in losses through unwise trading. Again, an ordinarily competent Fed chairman would have seen that LTCM was a fly-by-night operation with no possible importance to the financial system except for its size. Its death might have been a loss for the major New York houses, but it would have provided a lesson against over-aggressive lending and reliance on "value-at-risk" models. If any of the New York banks got into difficulties, then what better time than the boom of 1998 to find a rescue buyer to bail them out?
Instead, Greenspan bailed out LTCM, and compounded his error by dropping short-term interest rates by 75 basis points (0.75 percent) at a time of rising inflation and galloping money supply. The result was the last, record-setting extravagances of the 1999-2000 dot-com bubble, almost all of it wasted money, all of which could have been avoided by a more sober policy.
I have postulated in past columns that when he became close to his current wife, liberal journalist Andrea Mitchell, Greenspan ceased to be the cautious, conservative steward of the nation's money supply, and has instead become a media-mad, bubble-friendly expansionist. Certainly in 2001, he has cut the Federal Funds rate 10 times, and seems likely to cut it an 11th, all without any useful effect in fighting the recession we are entering, beyond pushing up asset prices and delaying the much-needed onset of reality in both stock and housing markets. Style has, admittedly been omnipresent in the Greenspan Fed chairmanship but competence, in the last decade, hasn't.
It's difficult to see how the employment of incompetents at the top can be avoided. The main linking factor between the incompetents discussed would appear to be an outsize ego -- but then an inflated ego is also the hallmark of some of our greatest leaders (think Churchill, or indeed Gates.) It would, however make sense to ensure that the penalties for incompetence are increased to a level which might deter it -- the California attorney general's prescription for Enron Chairman Kenneth Lay during the state's energy crisis of "a night in the cells with a man called Spike" seems much more appropriate now than it did six months ago, when the comment was made.
Again, however, we must avoid penalizing simple, honest errors. Those could happen to anyone.
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