Honolulu Advertiser Second Opinion column by Cliff Slater
August 5, 2002
(1) Kindleberger, Charles P. Manias, Panics, and Crashes: A History of Financial Crises. Basic Books. 1978. p. 78.
(3) An Andersen Old-Timer Recalls When Prestige Was Bottom Line. Wall Street Journal Online. July 15, 2002 & Andersen Verdict Won't Help Enron Plaintiffs Collect Cash. Wall Street Journal Online. June 19, 2002. When did one ever hear of financial reverses being suffered by government employees for their own failures, let alone those committed by their colleagues.
Market always corrects itself
That some businesspeople are dishonest is nothing new; it is ongoing and continual. Nor is it new that greed on the part of investors leads to speculative manias, which in turn encourage businesspeople to act dishonestly.
The tulip bulb craze in the 1600s, the South Sea Bubble in the 1700s, and investor fads for new technologies such as canals, railroads, streetcars, and automobiles have all in their time sparked speculative manias—and subsequent crashes. In time, the telecom mania will be seen as one more of them—and it will not be the last.
As one economic historian puts it, “The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom.”(1)
Accounting dishonesty? When the dust settles, we will find that only a few companies were guilty of it out of 10,000 public companies listed.
The Wall Street Journal recently itemized just 23 companies “whose business practices are being questioned”(2) and the list includes WorldCom and Enron. These accounting frauds will quickly self-correct because investors and stock analysts have been bitten hard and will not likely be bitten the same way twice.
Dishonest auditors? We will likely find that Enron and WorldCom’s auditors, Arthur Andersen, had only a few of their partners involved in these scandals out of the thousands of partners they have. For that, they and all their fellow partners, even retired ones, have paid dearly; their pensions are likely worthless along with their ownership of the firm. (3)
This dishonesty by a few will self-correct because even the most junior partners in all the remaining auditing firms will now carefully scrutinize the internal audit procedures being put in place by their colleagues—if for no other reason than to protect their pensions and livelihoods.
Outrageously high salaries and monstrous stock options in public companies? These are all disclosed in company filings; if you object to them, don’t invest in the companies that have them. But, remember that the smartest executives will be working at those who do.
Greedy investors? Those guilty of “irrational exuberance,” in Greenspan’s treasured phrase, who have lost their shirts, are angry and want to lay blame everywhere but on their own greed.
However, every investment adviser appearing on TV during the 1990s warned us that we should diversify our investments to lessen risk. Some investors ignored that, put all their money into one stock or one industry, and had only derision for bonds. They were the ones who whined when events happened that they had been warned about time and time again.
The result will be new legislation. Undoubtedly, this will prolong the market’s self-correcting actions. The market will always correct itself, despite government meddling, because the incessantly greedy investment bankers and stockbrokers cannot make any money unless the mob gets back in the market.
For that, the mob will have to believe again that the accounting and the auditing of listed companies and analysts recommendations about them are relatively honest. Therefore, those who profit from the buying and selling of stocks will do whatever is necessary to ensure this happens—that is the way markets work.
But we will get protective legislation anyway, and it will call for more bureaucrats for the SEC. They will then get busy with bureaucratic controls and further hamper the market. As Jefferson warned us, "The natural progress of things is for government to gain ground and liberty to yield."(4)
Cliff Slater is a regular columnist whose footnoted columns are at www.lava.net/cslater