Los Angeles Times, June 27, 2002
Newsday (New York), June 30, 2002
The Times Union (Albany), June 30, 2002
The Plain Dealer (Cleveland), June 30, 2002
Kansas City Star, July 1, 2002
In the last two months, people have begun asking whether the intelligence agencies had the information, or should have had the information, needed to prevent the Sept. 11 attacks. It is an appropriate question.
It is also a question that should be asked about two other disasters that have done enormous damage to the nation: the crashing stock market and the plummeting dollar. This week's reports of fraudulent accounting at WorldCom make this question all the more urgent.
As a result of the stock market plunge, millions of workers, who had looked forward to a comfortable retirement, have seen much of their savings evaporate. They will have to either delay their retirement or get by with a far lower standard of living. Millions of other families lost much of their children's college funds. The dollar's decline will also whack the economy in ways that are just beginning to be seen. Most important, it will make it more difficult for the Federal Reserve Board to boost the economy from its current slump, thus keeping the unemployment rate at high levels.
Unlike the Sept. 11 attacks, there is no question that the financial disasters were foreseeable--a small group of economists tried to warn the public about the dangers of an inflated stock market and overvalued dollar. Unfortunately, we were a small minority that was largely ignored. Most economists were happy to celebrate the stock market and dollar bubbles as good news.
Politics played a large role in the story, and the blame is bipartisan. The Democrats under President Clinton were happy to take credit for the nation's prosperity at the end of the 1990s. Although some of the prosperity was real (e.g., the lowest unemployment rate in 30 years), the bubble part of it was not. But there was little political value in calling attention to this fact. The Republicans did not want to burst the bubbles because the illusory prosperity provided the revenue to pay for their tax cuts.
Recognizing these bubbles didn't require great insight. For example: To see the story of the stock market, imagine that there is a government bond that pays $5 interest every year and has always sold on the market for $100. This means that the bond pays a 5% return. Now imagine that the price of the bond has been bid up to $200. Since the bond still pays just $5 a year in interest, the return will have fallen to 2.5%.
Unless people are willing to receive a much lower return on this bond than they had in the past, the $200 price will not hold. To escape this logic, profits would have to grow far faster than any serious economists projected. Even the accounting scandals now being exposed were both predictable and predicted.
In a world in which investors are willing to believe unreal numbers, it is inevitable that some will seek to profit by deliberately producing their own unreal numbers. But the country did not have to be taken in.
Unfortunately, the economists acted like the accountants at Arthur Andersen and said exactly what those with money and power wanted them to say.
The reporters who cover these issues, with few exceptions, acted just like the business reporters who repeatedly named Enron one of the nation's top companies: They celebrated the bubbles.
Similarly, "strong dollar" became a mantra, with few showing any recognition of its implications. In short, the people with responsibility, who should have known better, completely failed in their jobs.
But one feature of the "new economy" seems likely to hold through this disaster. The people on top, those who were most responsible, will survive relatively unharmed by the crashes.
Few economists, economic reporters or market analysts are going to find themselves either out of work or facing poverty in their old age. That fate will be reserved for the people who listened to their advice.