A Few Words Archives - Half Formed Thoughts 7/24/02

It’s The End Of Capitalism As We Know It (And I Feel Fine)

The stock market, which has been performing somewhat badly for some time, has recently gone into freefall. The timing is quite peculiar, as we’ve been hearing word from the fortune tellers who call themselves economists that the economic recovery has begun. Our esteemed George W. just recently offered his deep wisdom on the market’s drop as nothing more than a rational pullback from the artificial highs created by the dot-com explosion. The Dow had no business being as high as it was in the first place, and the inevitable return to sane, rational levels is merely being exaggerated by a wave of panic selling.

Things aren’t as bad as they seem. That little fairy tale might be a bit more believable if it weren’t for the daily headlines reminding us of exactly what has brought about this exodus from the stock market: corporate fraud.

As much as I hate to excuse the CEO’s who pocketed millions in stock options while their companies floundered, it’s the investors themselves who are mostly to blame. When there is an unbalanced focus on the day-to-day fluctuations of a company’s stock price, and little thought given to its long-term growth and viability, we shouldn’t be surprised that some find the pressure to twist reality a little to tempting.

But no con game goes on forever, and the truth usually tends to win in the end. I don’t know if Enron, Tyco and Worldcom are the tip of the iceberg, or merely isolated offenders in a sea of honesty. But I do know what the big money investors think, and they’re not often wrong.

Predictably, the scandal has brought the anti-capitalist Chicken Littles out of hiding. Suddenly it’s cool again to suggest that capitalism only works for the wealthy few. It’s not that the enemies of the free market have ever stopped their preaching, it’s just that now they are getting more press coverage and people seem more receptive to their message.

They way they see it, all these accounting scandals are proof of the corruption inherent in the system. If money is the bottom line, then people will do anything to make money, honest or dishonest. The corporations are irredeemably evil. The government needs to step in and force these companies to be more honest and police a system which can’t be trusted to police itself.

Except is that really true? How were these lies and schemes exposed in the first place? Did government regulators bust Enron? No, I as I recall these scandals were exposed because the accountants had run out of wiggle room. I’m not an accountant, so I don’t know what loopholes and sleight-of-hand tricks they used to make extra earnings appear out of nowhere, but eventually someone has to actually produce that promised money. Every pyramid scheme breaks down sooner or later, and I’d be willing to bet that most of the folks responsible for Enron feel more relief than shame at finally being exposed.

The federal government can pass all the laws they want, but you, I, and O. J. all know that once you get enough money, you don’t need to be afraid of the law. The politicians will get their face time by appearing tough on white-collar crime, but they’re not stupid enough to do any real damage to the hand that feeds them.

The CEO’s only respect one thing: their company’s stock price. And so they only fear one group of people: their stockholders. If a CEO makes himself a few extra million at the expense of other millionaires, rest assured that he will be held accountable by them. If a CEO makes himself a few extra million by raping the environment, well, I think that’s the subject of a completely different column.

I suppose the point I’m trying to make is that contrary to public opinion, this whole affair is proving that the free market is functioning exactly as it should. The companies the lied are being punished with bankruptcy. It’s true that the innocent companies (ha!) are being caught in the wake, but there’s no doubt they’ll be back, and stronger than ever once they pick up the business of the now-defunct operations. Just as the investors caused the problem, their own self-interest will surely solve it.

So we don’t need to look for salvation from the federal government. And, to paraphrase demonized capitalist Martha Stewart, that’s a very good thing. Because both political parties are already experts at twisting financial projections to meet their own desires. Both parties already use plenty of creative accounting when it comes to Social Security, creating surpluses out of deficits. Is there any difference between what Worldcom did, reporting future earnings in present fiscal years, and what our legislators do every year in raiding Social Security to “balance” the budget?

Instead of looking at the accounting scandals as an opportunity to score points with Mr. And Mrs. America, politicians should be asking themselves the very serious question of whether or not they’re looking at their own future.

Email Steve with any comments at aenor@aurora.mv.com