Socialist Action /May 2000
A Bad Week on Wall Street
By NAT WEINSTEIN
On April 15, the day after Wall Street suffered one of its worst weeks
since 1987, the editors of The New York Times felt the need to reassure
investors that the sky was not falling.
Knowing that treating the sharp decline in stocks as insignificant would
not be taken seriously, The Times editors laid the basis for boosting confidence
and forestalling any tendencies toward panic by frankly acknowledging its
ominous implications. But at the same time, they took pains to assure anxious
stockholders that the economy was in no real trouble.
It was a slick piece of soothsaying that was designed to contribute to
the Wall Street rebound that took place the following Monday. This is how
this authoritative voice of American capitalism dealt with the previous
week's events. (The Times editorial was titled, "The Market's Breathtaking
Plunge."):
Economists have warned for years that stock prices are unrealistically
high, needing to fall by about a third, by one prominent estimate, to regain
financial sense. But no amount of warning could take the fright out of yesterday's
record drops in all major stock averages. Investors lost about $1 trillion
yesterday. Besides the horrific blow to personal wealth, there is the added
threat to the health of the overall economy.
How important an event yesterday's plunge proves to be depends on how
much the market bounces back next week, and on other factors as well. Will
people reduce their spending enough to trigger a recession? Will businesses,
finding it harder to raise money on Wall Street, cut back investment plans,
delivering a blow to long-term economic growth?
On these scores, there are firm reasons to remain optimistic. Stocks
lost an astounding 23 percent on a single day, Oct. 19, 1987. Yesterday's
major averages dropped between 5 and 10 percent. Yet even the 1987 debacle
caused relatively little hardship on Main Street. Under the shrewd leadership
of Alan Greenspan, the Federal Reserve kept the economy growing. Mr. Greenspan
is still in charge of the Fed, and he has the tools to make sure that Wall
Street and Main Street do not rise and fall in lockstep....
Newsweek magazine played up the depression danger more forcefully than
The Times. The edition of this magazine that arrived in my mailbox on April
18 raised the ominous specter of another 1929 resulting from this near meltdown
of stocks.
But there was no danger that frank acknowledgement of this possibility
might contribute to the danger of a worse sell-off when markets reopened
on Monday, since the parallel between the mid-April stock slide and Black
Friday week, 1929, was already widely perceived.
After all, over the last several years, an increasing number of respected
capitalist economists had been entertaining the likelihood of a crash-many
citing as evidence the unnerving similarity between events leading up to
the Great Depression of the 1930s and the course of events in the 1990s.
The threat of another such crisis was, and is, in the air and is not
likely to go away-even if it should happen that stocks resume their run
up to new heights.
The front page of Newsweek featured in bold type the question: "Is
the Bull Market Over?" And the feature article inside was titled, "The
$2.1 Trillion Market Tumble." (That's how much was lost in paper wealth
by stockholders that week.)
The first two pages of this Newsweek commentary featured a herd of bulls
stampeding madly off a cliff. The article described the 25.3 percent drop
in Nasdaq averages as "the worst one-week decline ever posted by a
broad U.S. market index. Worse than legendary Black Friday week in 1929,
worse than the week of the 1987 crash that sent the Dow industrials down
22.6 percent in a single day."
The bottom of the next two pages laid out the ominous possibilities inherent
in the sharp stockmarket decline with a series of cartoons illustrating
what this magazine called a "Nightmare Scenario." The cartoons
boldly described the possible consequences "if the correction becomes
a crash."
The cartoons were strung across an ocean setting and spread along the
bottom of the two pages. The first cartoon showed a bull splashing helplessly
into the deep; the second and third showed office buildings shaped like
dollar signs sinking, with bankrupted stock holders leaping from the rooftops;
the fourth depicted a woman with babe in arms, stranded on the roof of a
house symbolizing mass foreclosures as in the Great Depression; and the
fifth showed an unemployed man on a raft holding a sign saying, "Need
Work."
Newsweek, like The Times, however, was also careful to emphasize the
countervailing factor of an allegedly still-strong economy. But notwithstanding
its call for optimism, the magazine's treatment of the previous week's events
reflected what appears to be a genuine apprehension by a growing number
of sober bourgeois economists that a major economic collapse, global in
scope, could no longer be discounted, and that the longer a "correction"
is postponed, the worse it will be.
Commentary by Wall Street pundits in the recent period, especially since
the week ending April 14, has tended to hit on many of the same themes.
Paul Krugman, for instance, a professional economist who now writes a column
for The New York Times, wrote a piece in the paper's April 15 edition on
the irrational exuberance of large and small players in the world's biggest
gambling casino-called Wall Street.
He gives a short description of what many have characterized as the "herd
mentality" displayed by large and small Wall street game-players:
"Investors buy because others are buying, sell because others are
selling. When stock prices are rising, it's called 'momentum investing';
when they are falling, it's called 'panic.' And panic, which has been building
all week, broke out in full on Friday. ... But will the turmoil in the stock
markets spill over ... into the real economy generally? Is this the end
of the 'Goldilocks economy'?"
(The reference to a favored bedtime story, Goldilocks and the Three Bears,
served Krugman as a euphemism for the argument that the economy is really
in fine shape because all the conditions for continued prosperity are "neither
too hot nor too cold-but just right.")
And like most others writing on the economy since April 14, he couldn't
help mentioning 1929-because like it or not, the current gyrations of stock
prices evokes memories of that most infamous stockmarket crash. But unlike
most other commentators, he argued that there is no comparison between 1929
and now.
He briefly notes that the stock slump 31 years ago, unlike now, was due
to "institutional weakness and sheer policy stupidity." But he
claims that that is no longer the case. (By "institutional weakness"
he presumably means that capitalism has learned from its mistakes and has
redesigned its institutions for steering the economy through economic storms
like the one that broke loose in 1929.)
But like The Times and Newsweek commentaries mentioned above, his main
message is one of optimism. Thus, he ends his column with this uplifting
advice to panicked investors: "Goldilocks is still alive and well.
And anyone who has been selling [their stocks] on the belief that it is
the end of the world ought to take a deep breath and calm down."
Ironically, while he puts down those he treats as fools who stupidly
follow the leader, he doesn't, however, place any blame on the brokers,
professional touts, and other "leaders" that have been getting
rich giving herdlike "fools" the very same advice he ends his
column with!
Enduring revival, or dead cat bounce?
By the time the Sunday, April 23, edition of The New York Times appeared,
a week-long, but spotty, economic rebound had occurred. But it was not yet
clear whether or not the latest correction would lead to another climb to
new heights like the one following the 1987 one-day decline. And even if
it does, it is already being increasingly punctuated by steep rises and
falls in market averages. Such volatility is a symptom of an organism that
is very sick.
In fact, a chart appearing on the first business page of the April 23
edition of The Times mirrored the pessimistic content of the lead article,
titled, "Seeking Solid Ground Amid Falling Bodies." The chart,
comparing the fall and subsequent limited rebound of "new economy"
stocks listed on the Nasdaq, was not a source of renewed confidence.
The chart appeared under a caption posing the $64 question-"Enduring
Revival, or Dead Cat Bounce?" Posing the question this way accurately
reflects the mood of generalized uneasiness on Wall Street, and even fear
that the bull market is finished.
A companion article on the same page, titled, "The Making of a Market
Bubble," struck a similar note of apprehension. The subtitle summed
up the state of disarray on Wall Street with the words: "The Internet
Frenzy Ebbs, As Founders and Financiers Apportion the Blame."
There can be no doubt that investor confidence in the economy has been
damaged. But "confidence" is merely a psychological reaction to
the largely hidden movement of market forces. Neither psychology nor the
turbulence of the stock market are the cause of economic sickness or health.
It only appears that irrational mass investor optimism or pessimism concerning
the health of the economy is responsible for wild swings in stock prices.
Rather, it is the irrationality of an anarchic economic system that really
defies human control that is responsible.
In any event, last month's bad week on Wall Street sharply damaged the
message promoted up until now by Bull Market tipsters and cheerleaders-that
the so-called "New Economy" had opened up a new era of permanent
expansion and unmatched prosperity.
The 'New Economy'
In the first place, it must be said that the term, "New Economy,"
is inaccurate and misleading. It implies that capitalism has evolved to
the point that the fundamental laws governing the market-driven economic
system have changed. What is indeed changing, however, is not new in the
sense intended. Rather, it is entirely in accord with historic phases of
more rapid economic expansion based on scientific and technological breakthroughs.
That is, the last several hundred years have witnessed the emergence
of new industries such as those that flowed from the invention and practical
development of the steam engine, telegraph, telephones, radio, electrification,
and internal combustion engines.
The development of the gasoline, diesel and jet engines, moreover, made
practical a variety of new, mass-produced commodities, such as automobiles,
airplanes, helicopters and jumbo-jet aircraft.
Thus the latest breakthroughs in science and technology have led to the
creation of another brand new industry based on control over the subtle
and counter-intuitive forces in the microcosm-i.e., electronics.
It has produced a mind-boggling variety of new products-including computers,
cell phones, and other electronic devices. Also deriving from electronics
are robots and other computerized mechanical machines doing the repetitive
but skilled functions formerly done by human beings on assembly lines. And
spinning off from electronics are a range of products and services coming
under the general heading of "information technology."
Such innovations produce a qualitative expansion of the productive forces
of society. But all things come to an end and so too did each of these upsurges
in the productive forces. Moreover, history teaches that when they do, there
is hell to pay; and the form of payment is in the currency of much human
suffering.
'Productivity: The Emperor's New Clothes'
InvesTech Research is one of those publications issued by market analysts
who make their living by selling advice to investors. We received the April
14, 2000, edition of this publication in our office while working on this
piece. It was sent to us by one of our readers (to whom we are obliged).
This journal contains statistical information, coming from the horse's
mouth, as it were; and we refer to it because it serves to support some
of the conclusions in this article.
Under the heading, "Productivity: The Emperor's New Clothes,"
the (unnamed) author of one of the reports in this prospectus starts his
commentary with a quote from the April 4 Financial Times. He writes:
Mr. George [governor of the Bank of England] also warned that he saw
no sign in Britain of the pick-up in productivity growth caused in the U.S.
by new technologies. "The sad thing is, even though we fervently look
for it, we don't see in the data here the sort of improvement that they
have seen," he said.
The author later quotes Alan Greenspan on the matter of productivity:
"...there can be little doubt that not only has productivity growth
picked up from its rather tepid pace during the preceding quarter century
but that the growth rate has continued to rise, with scant evidence that
it is about to crest."
The author critically responds, arguing that productivity is the most
"elusive of economic measurements." He claims that government
statisticians can no longer stand at the end of an assembly line and count
the number of widgets coming off per hour.
Instead, he argues, the government agency that does the counting must
somehow "measure overall economic output, divide that by some elusive
gauge of labor input, and adjust the whole works for what they think is
the impact of inflation. Productivity is the ultimate figure that drops
out the bottom...."
He goes on to quote a researcher, a Professor Robert Gordon of Northwestern
University, who in his published findings argues that the alleged surge
in productivity has been centered in a single industry. Gordon concludes:
"There has been no productivity growth acceleration in the 99 percent
of the economy located outside the sector which manufactures computer hardware."
The author then comments, "But the real stickler is how the Bureau
of Economic Analysis calculates the price index for that industry.
He goes on to say that in the eyes of most real-world businesses, a computer
"becomes obsolete in 3-5 years and must be upgraded." He notes
that generally, "the new one is intended to perform the same tasks
as the older one albeit with some improvement in speed (and hopefully less
crashing)." He points out, however, that no business views a speedier
computer processor as twice as productive. He explains that "a 10
gigabyte hard disk isn't a whole lot more useful than a five gigabyte hard
disk."
But he drives home his main point by noting that those who measure productivity
don't see it that way. For instance he pointedly notes that those officially
responsible for calculating output tend to divide the total dollar output
by the price index. And because the computer price index currently shows
sharply declining prices, the dollar output only appears to soar along with
the officially "determined" ("exaggerated" would be
a better word) sharp rises in productivity.
The author concludes with this:
Dr. Kurt Richebacher, one of the "old world" thinking economists,
was the first that we know of to bring this disparity to light. His assertion
is that the government is measuring output in the computer industry as if
Detroit was measuring output in cumulative horsepower. "Hey, we boosted
average engine horsepower by 25 percent last year-that's a 25 percent improvement
in productivity!" Or it could be the same as measuring Detroit's productivity
by the average number of cupholders or seats per vehicle.
That may sound ridiculous, but it's really happening. And the "productivity
miracle" could vanish as mysteriously as it appeared-once growth in
the high tech sector starts to slow....
If today's "new economy" meets an untimely demise, this productivity
boondoggle will be at the heart of the controversy and explanation. In the
end, the Emperor's new clothes may not turn out to be as shiny and protective
as they appeared.
On April 29, further reports appeared in The New York Times further reflecting
widespread bafflement among capitalism's economic experts at the increasing
unpredictability of global capitalism's economic trajectory. George Soros,
for instance, after seeing his huge network of highly speculative five "hedge
funds" suffer a 20 percent loss-from $22 billion to $14.4 billion since
the beginning of this year, frankly admitted that he had made costly misjudgments.
But this wily old empire builder, whose multi-billion dollar Quantum
Fund alone has recorded an average profit of 32 percent a year between 1969
and 1999, revealed his insightfulness with a subtle metaphor expressing
the unpredictability of the infinitely complex globalized capitalist economy.
He reportedly told a news conference: "Maybe I don't understand the
market. Maybe the music has stopped but people are still dancing."
Yes, people keep dancing and freight trains remain in motion, long after
the music has stopped and engines run out of fuel.
Socialist Action /May 2000 |