The ongoing turmoil in America’s stock markets and a series of corporate scandals have attracted considerable attention from commentators and editorialists all over the developed world, who fear that economic instability in the United States may plunge the world’s top businesses into a vicious cycle of doubt and deferred capital investment. With the world’s stock markets still reeling from a long list of corporate scandals that have destroyed some of America’s biggest companies, one comfort appeared to remain: America’s economic recovery seemed strong. On the last day of July, however, that reassurance was brushed aside as well, when survey data published by the Federal Reserve confirmed indications of a slowing and even faltering recovery. Some analysts claimed that the bottom has been reached: “It’s a time of maximum pessimism, so I must buy more US stocks,” declares the Sydney Morning Herald’s James Bone. Others—the majority—were markedly more nervous, as the Dow touched its lowest point since October 1998, thus officially wiping out all of the nominal gains made in the dot-com explosion of the late 1990’s.
The Financial Times saw the passage of the Sarbanes-Oxley Act as “only the first mouthful to feed what looks like an increasingly large appetite for far-reaching overhaul of US corporate governance on the part of the American public”:
The bigger question after Sarbanes-Oxley is what else should be done to correct some of the flaws that continue to be exposed by the receding tide of the 1990s boom . . . the intolerable plundering of nearly bankrupt companies by senior executives as their businesses were going down the drain. A host of other issues—from pension protection to the role of directors—awaits further consideration. All these problems are critical to public confidence in US companies. The trick is to deal with them without putting chief executives in a straitjacket of new regulations that will stifle risk-taking and innovation.
Some analysts are not certain whether the circle can be squared. On July 23, the London Independent’s financial columnist Jeremy Warner expressed his fear that the U.S. economy has not yet ground to a halt; unless shares rebound soon, however, it surely will:
In the US at least, the fear is that the bad news has only just begun. Whether or not shares have fallen so far that they are now fair or good value, investors are in no mood to listen. People believe they were conned during the exuberance of the boom, as indeed they were, and confidence will take a long time to recover . . . President George Bush was at it again yesterday attempting to act as a cheerleader for the stock market. From what he hears “corporate profits are improving, which means value will be available for those who invest in markets.” You have to wonder who [sic] he is talking to. That’s not the word coming down the line from most companies. If Mr. Bush’s purpose is that of attempting to bolster confidence, he should take note of how little good came of it when his Treasury Secretary, Paul O’Neill, did the same thing. . . . The fundamentals for US economic growth may be as real as Mr. Bush believes, but if the stock market keeps falling like this, they soon won’t be. The summer holidays will provide some respite, but even so the next few weeks could be crucial. It is as if some ghastly meteorite is heading towards us. Will it hit, or is there to be another narrow miss? Recent history would point to the latter outcome. On the other hand, we haven’t had a serious economic catastrophe for an awfully long time now.
A fortnight earlier, the Economist had noted that, as the first American President with a master’s degree in business administration, Mr. Bush was always expected to be more than a little friendly toward Corporate America and Wall Street; but, in the wake of corporate accounting scandals, friendliness to boardrooms and financiers has become a political liability:
Even now, many of Mr. Bush’s measures will require a large amount of self-policing by companies and stock markets. The clamour for tough action has grown with every revelation and every wriggle of highly-paid executives trying to get off the hook. . . . There is no doubt that the corporate scandals have started to harm Mr. Bush’s administration and Republicans at large, especially with mid-term elections for Congress due in November. What people will now have to decide is whether members of the administration are speaking out only for political purposes or if they are really doing something to clear up corporate abuse. Mr. Bush’s new measures will greatly increase the potential punishments facing errant bosses. But will they really go far enough? The SEC is already introducing new requirements for firms. Yet despite this, even more forceful legislation is currently being steered through Congress by Senator Paul Sarbanes. His bill is much tougher on auditing firms than the SEC’s proposals. . . . This means Congress may yet seek harsher measures than Mr. Bush’s proposals.
In the Times of London on July 23, Anatole Kaletsky declared that the collapse of investor confidence has more to do with politics than economics: The Bush administration’s immunity to criticism, bestowed on it by September 11, has been shattered by the WorldCom and Enron accounting scandals and the personal involvement of the President and Vice President in several questionable transactions. As a result, he writes, the Democrats may win control of both houses of Congress on November 5, paralyzing U.S. politics and turning Bush into a lame duck for his last two years in office. In the meantime, there is no reason for panic:
Instead of anticipating a recession, investors are just modestly downgrading their expectations for economic growth. At the height of the internet fever, the U.S. was widely expected to enjoy long-term economic growth of 4 per cent a year. A trend growth rate of around 3 per cent always seemed more plausible. But given the long-run strain on the US economy from President Bush’s military and fiscal policies, I have long suspected that a growth rate of around 2.5 per cent might be more plausible in the next few years. If this turns out to be true then a downward adjustment would seem quite reasonable. The question is how much more adjustment will be required before investors are prepared for “normal” economic conditions. . . . There is no reason to suppose that stock market slump foreshadows a world recession or any other economic crisis. More likely, it just represents an adjustment to the mundane reality of 2 or 3 per cent growth in the U.S. On this assumption, stock market prices in America are no longer very expensive, as they were in the late 1990s, but neither are they particularly cheap.
Two weeks earlier, Times foreign editor Bronwen Maddox argued that the Bush administration would find it more difficult to impose its foreign-policy agenda on its partners as the result of its economic woes:
Abroad, it is already a clear handicap for Bush. . . . Those who have felt aggrieved by American demands for reform—or are straightforwardly unwilling to comply—are not about to let Bush forget the scandals. This is not a case where he can escape a messy problem at home by reaching abroad for respite.
In France, Le Monde questioned whether President Bush might be guilty of the types of crimes he is now denouncing so loudly:
Revelations about his own oil company sold to Harken Energy and Vice President Chaney’s involvement with Halliburton . . . weaken considerably the president’s position just months before the mid-term elections. They cast doubt on the Bush administration’s determination to eradicate corporate fraud. . . . They re-enforce the old feeling that President Bush owes his personal fortune and his career to practices which may or may not fall within the “ethics” he has been promoting.
The problem of ethics in the American corporate community long antedates the Bush presidency, says the Guardian (July 23), harkening back to an unlikely culprit—Lee Iacocca:
But if it weren’t for Iacocca, it is unlikely that we would be talking about Enron and WorldCom today . . . Iacocca’s ascent signaled a dramatic change in American culture. Prior to [sic] him, the popular image of the American CEO had been of a buttoned-down organisation man, pampered and well paid, but essentially bland and characterless. The idea of the businessman as an outsized, even heroic, figure seemed like the legacy of a long-forgotten past when men like JP Morgan and William Randolph Hearst were still around. In fact, in 1982, Forbes magazine wrote, “Tycoons are fairly rare birds in today’s business world. We seldom hear of moguls.” Within just a few years, that had all changed, with business journalists turning every clever executive with a good idea into the next Henry Ford, and with the Rupert Murdochs, Sumner Redstones, and Donald Trumps of the world actively cultivating the “mogul” label. By the time the boom of the 1990s rolled around, CEOs had become America’s superheroes, accorded celebrity treatment and followed with a kind of slavish scrutiny that Alfred P Sloan could never have imagined.
The systemic questions raised by the bursting of the stock-market bubble and the revelations of corporate corruption do not, in the end, have much to do with the virtues or vices of markets per se, concludes the Guardian. They have to do with the vigilance and regulation that markets need in order to work. The delusion that everyone labored under in the 90’s was that self-interest alone would point everyone in the same direction. What is only now becoming clear is that, without the right kind of restraints on self-interest, the system is given to fragmentation. The stock market will be suffering the consequences of these scandals—in the form of lower stock prices and lowered expectations—for years to come. The United States, on the other hand, may escape from all of this without any sustained damage to its real economy:
The historian Richard McCormick famously argued that Progressivism was the product of “the discovery that business corrupts politics”. But what we seem to have discovered in the past year is simply that business corrupts business. It may be an obvious lesson, but apparently it has to be learned over and over again.
The Economist noted on August 1 that the risk of another downturn is still present:
It now turns out that last year’s recession was significantly worse than previously estimated, and growth in the first three months of 2002 a bit less impressive than earlier statistics had indicated . . . The new figures are a blow to hopes that America’s economic recovery is well established. Suddenly, the recovery looks weak and the economy looks vulnerable to further shocks. The determination of American consumers to keep spending has bolstered the economy for so long. If consumers should now lose heart, as some recent surveys suggest they might, all bets will be off. Another downturn—a so-called “double-dip” recession—would then be highly likely. With Europe and Japan still in the doldrums, the forecasts of steady global growth this year could soon look overly optimistic.