"How many times can you say 'unbelievable'?" my wife asked the other morning, as I was rattling the newspaper and again exclaiming over the latest outrageous news from American capitalism. Maybe it was the story about the CEO of Tyco International, a very wealthy and much admired titan, being indicted for evading the New York State sales tax on his art purchases. Perhaps it was the disclosure that the soaring market in energy trading, a jewel of the new economy, was largely a fabrication built on phony round-trip trades. Or the accusation that Perot Systems, after designing California's deregulated energy-trading system, turned around and showed the energy companies how to blow holes in it (and generate those soaring electric bills for Californians).
It is unbelievable--what we've learned in the past six or eight months about the financial system and corporate management. The systematic deceit and imaginative greed--the sheer chintziness of personal finagling for more loot--go well beyond the darkest hunches harbored by resident skeptics like myself. Indeed, the Wall Street system is now being flayed in the media almost daily by its own leading tribunes. Listen to this summary of the scandals: "The failures of Wall Street's compliance efforts are coming under intense scrutiny--part of a growing awareness of how deeply flawed the US financial markets really are. The watchdogs charged with keeping the financial world honest have all lost credibility themselves: outside auditors who bend the rules to please corporate clients, analysts who shape stock recommendations to woo investment-banking customers and government regulators too timid or overwhelmed to keep track of the frenzy." You might have read those points in The Nation, but these words appeared on the front page of the Wall Street Journal. A week later, another page-one Journal story crisply explained the implications for global investors: "Boasts about world-class corporate disclosure, bookkeeping and regulation of American financial markets have become laughable in the wake of Enron and Arthur Andersen scandals."
When radical critique becomes mainstream observation, change may be in the air. In my view, this is a rare historical moment--conditions are ripe for reforming and reordering the system, an opportunity unmatched since World War II. How things really work is on the table, visible to all in shocking detail, authoritatively documented by the torrent of disclosures, with more to come. The libertarian ideology that colonized economic affairs and politics during the past two decades (markets know best, government is an obstacle, greed is good) has been pulled up short. The conservative orthodoxy is vulnerable--actually breaking down--because it has no good explanations for what we now understand to be routine malpractice in business and finance. Political tinder is spread all around the landscape, but who will strike the match?
The potential downside of this moment is also palpable and quite ominous: Nothing will happen, nothing will change--nobody goes to jail, no significant reforms are enacted. If so, the main result will be confirmation of an already endemic public cynicism and the further poisoning of American values. The revelations, instead of provoking a sea change in political thinking, may be smothered by the alignments of corporate-financial power, diverted into false reforms and complexified to the point that media attention and public anger are exhausted. In that event, the consequences for the country will be less obvious but profoundly corrosive. The system would go forward in roughly the same fashion (perhaps tarted up with public-relations rouge), and everyone would understand that corruption is the system. In markets and in the popular culture, the message would be: Forget that crap about ethics--might as well take the low road, since that's how the big boys get theirs.
The stakes are enormous, and it's much too early to predict the outcome. But there's already abundant evidence that the business establishment expects to ride out this storm and is working the usual political levers to insure it. The politics resemble the S&L debacle in the late 1980s, when Congressional Republocrats put out lots of noise and smoke but left the high-priced suits unruffled and stuck the public with the bill. Our current galaxy of scandals is far more grave because it is systemic. Anyone with courage among the Democratic presidential hopefuls could seize this moment and reorder the agenda for 2004, but no one so far has found the guts to break ranks with corporate power. Smoldering public anger, however, may yet find a way to express itself, perhaps in the fall elections, and rouse the reluctant politicians.
For now, the best hope seems to be that the bankers and business guys will react to the fact that financial markets have been severely damaged by the scandalous revelations, as have the high-flying moguls of corporate America. Who can trust them? Who wants to pour more good money after bad? In other words, this scandal stuff is bad for business, especially bad for the faltering stock market. Henry Paulson Jr., chair of Goldman Sachs, delivered that message recently in a sober speech before the National Press Club and endorsed a number of useful reforms. His remedies are insufficient (even the Journal editorial page was happy to bless them) but are a fair start. A chorus of high-minded anguish from elite circles might persuade Washington that this problem does need fixing.
The scandals of Enron et al., unfortunately, must compete with another story--the war on terrorism--that's more exciting, and threatening, than dirty bookkeeping or the looted billions. The two crises are intertwined in perverse ways. The smug triumphalism of Bush's unilateralist war policy could be abruptly deflated by economic events--which probably would be a good thing for world affairs, since Washington couldn't run roughshod over others, but terrible for US prosperity. The financial scandals have provided yet another chilling reason to be wary of the US stock market, and if overseas investors decide to take their money home in volume, the already declining dollar will fall sharply. Credit would thus become suddenly scarce, since our debtor-nation economy relies heavily on capital borrowed from abroad, and such a convergence would trigger an ugly downdraft in the US economy. In that event, the fashionable boastfulness about America, the only superpower, would implode as swiftly as Enron's stock price.