One bubble burst, then another and another. Enron, Global Crossing,
WorldCom. The rectitude of auditors--pop. Faith in corporate CEOs and
stock market analysts--pop, pop. The self-righteous prestige of
Citigroup and J.P. Morgan Chase--pop and pop again. The largest bubble
is the stock market's, and it may not yet be fully deflated. These
dizzying events are not an occasion for champagne music because the
bursting bubbles have cast millions of Americans into deep personal
losses, destroyed trillions of dollars in capital, especially retirement
savings, and littered the economic landscape with corporate wreckage.
Ex-drinker George W. Bush explained that a "binge" is always followed by
the inevitable "hangover." What he did not say is that the "binge" that
has just ended with so much pain for the country was the conservative
Economic liberalism prevailed from the New Deal forward but broke down
in the late 1960s when it was unable to resolve doctrinal failures
including an inability to confront persistent inflation. Now market
orthodoxy is coming apart as a result of its own distinctive failures.
It can neither explain the economic disorders before us nor remedy them
because, in fact, its doctrine of reckless laissez-faire produced them.
The bursting bubbles are not accidents or the work of a few
larceny-prone executives. They are the consequence of everything the
conservative ascendancy sought to achieve--the savagery and injustice of
unregulated markets, the blind willfulness of unaccountable
We will be a long time getting over the conservative "hangover." It may
even take some years before politicians and policy thinkers grasp that
the old order is fallen. But this season marks a dramatic starting point
for thinking anew. Left-liberal progressives have been pinned down in
rearguard defensive actions for nearly thirty years, but now they have
to learn how to play offense again. Though still marginalized and
ignored, progressives will determine how fast the governing ethos can be
changed, because the pace will be set largely by the strength of their
ideas, their strategic shrewdness and, above all, the depth of their
convictions. That may sound fanciful to perennial pessimists, but if you
look back at the rise of the conservative orthodoxy, it was not driven
by mainstream conservatives or the Republican Party but by those
dedicated right-wingers who knew what they believed and believed, most
improbably, that their ideas would prevail.
The new agenda falls roughly into three parts, and the first might be
described as "restoring the New Deal." That is, the first round of
necessary reforms, like the Sarbanes bill already enacted, must
basically restore principles and economic assurances that Americans used
to enjoy--the protections inherited from the liberal era that were
destroyed or severely damaged by right-wing deregulation and corporate
corruption of government. Pension funds, for instance, lost horrendously
in the stock market collapse and face a potentially explosive crisis
because corporate managers gamed the pension savings to inflate company
profits. Employees of all kinds deserve a supervisory voice in managing
this wealth, but Congress should also ask why corporations are allowed
such privileged control over other people's money. Broader reform will
confront the disgraceful fact that only half the work force has any
pension at all beyond Social Security and set out to create tax
incentives and penalties to change this.
Another major reconstruction is needed in antitrust law, to restore and
modernize the legal doctrine systematically gutted by the Reagan era
(and only marginally repaired under Clinton). The financial debacle
includes scores of companies concocted by endless mergers that pumped up
the stock price but added no real economic value. Others sought to build
the dominance of oligopoly and have succeeded across many sectors.
Spectacular failures include AOL Time Warner and the airline industry.
Skepticism of unlimited bigness needs to be renewed and should start
with the banking industry--reining in those conflicted conglomerates,
like Citigroup and J.P. Morgan Chase, created with repeal of the New
Deal's wise separation of commercial and investment banking.
New Dealers got a lot of things right, but the second dimension of new
progressive thinking requires a recognition that returning to the New
Deal framework is essentially a retrograde option (and not only because
the country is a different place now). Liberals ought to ask why so many
New Deal reforms proved to be quite perishable or why some of its
greatest triumphs, like the law establishing the rights of working
people to organize, have been perverted into obstacles for the very
people supposedly protected. In short, this new era requires
self-scrutiny and the willingness to ask big, radical, seemingly
impossible questions about how to confront enduring social discontents
and economic injustice.
Who really owns the corporation (clearly it's not the shareholders), and
how might corporations be reorganized to reduce the social injuries? Is
the government itself implicated in fostering, through subsidy and
tax-code favoritism, the very corporate antisocial behavior its
regulations are supposed to prevent? Congress, aroused by scandal, is
considering penalizing those companies that moved to Caribbean tax
havens yet still enjoy US privileges and protection. That's a good
starting point for rethinking the nature of government's corporatized
indulgences (old habits first formed in the New Deal) and perhaps
turning them into leverage for public objectives. To explore this new
terrain, we need lots of earnest inquiry, noisy debate and re-education
by a reinvigorated labor movement, environmental and social reformers
and ordinary citizens who yearn for serious politics, significant
A third dimension for new thinking is the economic order itself. During
the past two decades, a profound inversion has occurred in the governing
values of US economic life and, in turn, captured politics and elite
discourse--the triumph of finance over the real economy. In the natural
order of capitalism, the financial system is supposed to serve the
economy of production--goods and services, jobs and incomes--but the
narrow values of Wall Street have become the master. The Federal Reserve
and other governing institutions are implicated, but so are the media
and other institutions of society.
The political system is, of course, not ready to consider any of these
or other big matters. One of the first chores is to bang on the
Democratic Party, which, despite some advances, has expressed its fealty
to corporate money by clearing the fast-track trade bill and bankers'
bankruptcy bill for passage. This amounts to selling out principle and
loyal constituencies before the election, instead of afterward. Of
course the politicians are hostile--what else is new?--but now it's the
left that can say, They just don't get it.
Reversing the nation's deformed priorities will be a hard struggle but
has renewed promise now that the stock market bubble and other New
Economy delusions have been demolished. People do not live and work in
order to buy stocks. People exist in complex webs of relationships with
family, work, community and many other rewarding adventures and
obligations. The larger purpose of the economic order, including Wall
Street, is to support the material conditions for human existence, not
to undermine and destabilize them. If that observation sounds quaint,
it's what most Americans, regardless of ideology, happen to believe. If
our progressive objectives are deeply aligned with what people truly
seek and need in their lives, the ideas will prevail.
Thou hast taken usury and increase, and thou hast greedily gained of thy neighbor by extortion, and hast forgotten me, saith the Lord God.
When did the great executive stock option hog wallow really start? You
can go back to the deregulatory push under Carter in the late 1970s,
then move into the Reagan '80s, when corporate purchases of shares
really took off with the leveraged buyouts and mergermania, assisted by
tax laws that favored capital gains over stockholder dividends and
allowed corporations to write off interest payments entirely.
Between 1983 and 1990, 72.5 percent of net US equity purchases were
bought by nonfinancial corporations. At the end of this spree the
debt-laden corporations withdrew to their tents for three years of
necessary restraint and repose, until in 1994 they roared into action
once more, plunging themselves into debt to finance their share
purchases. This was the start of the options game.
Between 1994 and 1998 nonfinancial companies began to load themselves up
with yet more debt. The annual value of the repurchases quadrupled,
testimony to the most hectic sustained orgy of self-aggrandizement by an
executive class in the history of capitalism.
For these and ensuing reflections and specific figures, I'm mostly
indebted to Robert Brenner's prescient The Boom and the Bubble,
published this spring with impeccable timing by Verso; also Robin
Blackburn's long-awaited book (now being released by Verso) on the past
and future of pensions, Banking on Death.
Why did these chief executive officers, chief financial officers and
boards of directors choose to burden their companies with debt? Since
stock prices were going up, companies needing money could have raised
funds by issuing shares rather than borrowing money to buy shares back.
Top corporate officers stood to make vast killings on their options, and
by the unstinting efforts of legislators such as Senator Joe Lieberman,
they were spared the inconvenience of having to report to stockholders
the cost of these same options. Enlightened legislators had also been
thoughtful enough to rewrite the tax laws in such a manner that the cost
of issuing stock options could be deducted from company income.
It's fun these days to read all the jubilant punditeers who favor the
Democrats now lashing Bush and Cheney for the way they made their
fortunes while repining the glories of the Clinton boom, when the dollar
was mighty and the middle classes gazed into their 401(k) nest eggs with
the devotion of Volpone eyeing his trove. "Good morning to the day; and,
next, my gold:/Open the shrine, that I may see my saint."
Bush and Cheney deserve the punishment. But when it comes to political
parties, the seaminess is seamless. The Clinton boom was lofted in large
part by the helium of bubble accountancy.
By the end of 1999 average annual pay of CEOs at 362 of America's
largest corporations had swollen to $12.4 million, six times more than
what it was in 1990. The top option payout was to Charles Wang, boss of
Computer Associates International, who got $650 million in restricted
shares, towering far above Ken Lay's scrawny salary of $5.4 million and
shares worth $49 million. As the 1990s blew themselves out, the
corporate culture, applauded on a weekly basis by such bullfrogs of the
bubble as Thomas Friedman, saw average CEO pay at those same 362
corporations rise to a level 475 times larger than that of the average
The executive suites of America's largest companies became a vast hog
wallow. CEOs and finance officers would borrow millions from some
complicit bank, using the money to drive up company stock prices,
thereby inflating the value of their options. Brenner offers us the
memorable figure of $1.22 trillion as the total of borrowing by
nonfinancial corporations between 1994 and 1999, inclusive. Of that sum,
corporations used just 15.3 percent for capital expenditures. They used
57 percent of it, or $697.4 billion, to buy back stock and thus enrich
themselves. Surely the wildest smash and grab in the annals of corporate
When the bubble burst, the parachutes opened, golden in a darkening sky.
Blackburn cites the packages of two departing Lucent executives, Richard
McGinn and Deborah Hopkins, a CFO. Whereas the laying off of 10,500
employees was dealt with in less than a page of Lucent's quarterly
report in August 2001, it took a fifteen-page attachment to outline the
treasures allotted to McGinn (just under $13 million, after running
Lucent for barely three years) and to Hopkins (at Lucent for less than a
year, departing with almost $5 million).
Makes your blood boil, doesn't it? Isn't it time we had a "New Covenant
for economic change that empowers people"? Aye to that! "Never again
should Washington reward those who speculate in paper, instead of those
who put people first." Hurrah! Whistle the tune and memorize the words
(Bill Clinton's in 1992).
There are villains in this story, an entire piranha-elite. And there are
victims, the people whose pension funds were pumped dry to flood the hog
wallow with loot. Here in the United States privatization of Social
Security has been staved off only because Clinton couldn't keep his hand
from his zipper, and now again because Bush's credentials as a voucher
for the ethics of private enterprise have taken a fierce beating.
But the wolves will be back, and popgun populism (a brawnier SEC, etc.,
etc.) won't hold them off. The Democrats will no more defend the people
from the predations of capital than they will protect the Bill of Rights
(in the most recent snoop bill pushed through the House, only three
voted against a measure that allows life sentences for "malicious
hacking": Dennis Kucinich and two Republicans, Jeff Miller of Florida
and the great Texas libertarian, Ron Paul). It was the Senate Democrats
in early July who rallied in defense of accounting "principles" that
permitted the present deceptive treatment of stock options. Not just Joe
Lieberman, the whore of Connecticut, but Tom Daschle of the Northern
Popgun populism is not enough. Socialize accumulation! Details soon.
Events in Washington are potentially momentous, but hold the applause.
In late May, the Dow was at 10,300, but by mid-July it had dropped
almost 2,000 points. The Nasdaq and S&P indexes are at zero gain for
the past five years, as if the bubble never occurred. This slow-motion
crash induced even the most obedient right-wing lapdogs to scurry aboard
the Sarbanes reform bill, and the Senate passed it, 97-0. The President
made two malaprop-laced pep talks to recast himself as Mr. Reformer Guy
(and knocked another 500 points off the Dow). But W. is a lagging
political indicator these days. Even Federal Reserve Chairman Alan
Greenspan has lost his touch. For years he celebrated the new economy
and refused to take any action that might have worked to curb its
excesses; a bit late he tells us "irrational exuberance" was actually
"infectious greed." Now, with fear overtaking that greed in the markets
and thus in Washington, the ingredients are present for an ideological
sea change in American politics. But not yet.
Democrats, newly awakened to the potency of Enron-like financial
scandals, are throwing smart punches at the business-friendly White
House, but they are six months late to the cause (and still sound less
convinced than Republican maverick John McCain). The passage of Senator
Sarbanes's legislation is meaningful, but Democratic leaders choked on
the hard part--reforming stock options and giving workers a voice in
managing their own pension savings. Why mess up fundraising with those
high-tech companies dumping "New Dem" millions on the party of working
people? Majority leader Tom Daschle, who lamely promised a vote
(someday) on the stock-option issue, will be revealed as another limp
corporate shmoozer if he fails to deliver. So far, the Coca-Cola
directors have more courage than he. Likewise, Senator Joseph Lieberman
can doubtless raise millions from Silicon Valley for his presidential
ambitions by defending the corporate hogs but, if so, he should rethink
which party will have him.
The Republicans are in a deeper hole, of course. If Bush wants to bring
his much-touted "moral clarity" to the reform cause, he'll have to drop
the weepy speeches and dump Harvey Pitt as SEC chairman and Tom White,
the Enronized Army Secretary. Then Bush should take his own medicine and
come clean, open the secret SEC records of his insider cashout as a
director of Harken, and do the same for the SEC investigation of Vice
President Cheney's stewardship as CEO of Halliburton. Republican zealots
and their attack-dog newspaper, the Wall Street Journal,
exhausted the nation with their pursuit of the Clintons on Whitewater.
Stonewalling by the Bush White House promises to make these far more
serious financial matters a permanent theme of the Bush presidency.
The reforms currently in motion are a good start, but no more, as
William Greider notes on page 11. We know what to expect from the
Republicans--stubborn maneuvering and guile designed to stall real
change until (they hope) the stock market turns around and public anger
subsides. But Democrats have a historic opening far greater than this
fall's elections--the opportunity to revive their role as trustworthy
defenders of the folks who have always been the bone and sinew of the
party, the people who do not get stock options and who deserve a much
larger voice in Washington. If Democrats take a pass on the facts before
them, they deserve our scorn. If they find the courage to break out of
the corporate-money straitjacket and once again speak for the public,
this could be the beginning of something big.
While most of the media focused, with good reason, on the huge increase in military spending and dramatic cuts in domestic programs in President Bush's $2.1 trillion budget proposal for 2003, a fe
An awakened sense of outrage has reporters and members of Congress playing a fierce game of hounds and hares with Enron executives and other bandits, which is most fortunate for Alan Greenspan. If the Federal Reserve were not treated with such deferential sanctimony, its chairman would also face browbeating questions concerning his role in unhinging the lately departed prosperity. Newly available evidence supports an accusation of gross duplicity and monumental error in the ways that Greenspan first permitted the stock market's illusions to develop into an out-of-control price bubble and then clumsily covered his mistake by whacking the entire economy. These offenses are not as sexy as criminal fraud but had more devastating consequences for the country.
The supporting evidence is found in newly released transcripts of the private policy deliberations of the Federal Open Market Committee (FOMC) back in 1996--the fateful season when the froth of asset-price inflation was already visible in the stock market. In a series of exchanges, one Fed governor, Lawrence Lindsey (now the President's chief economic adviser), described with prescient accuracy a dangerous condition that was developing and urged Greenspan to act. Greenspan agreed with his diagnosis, but demurred. If Greenspan had acted on Lindsey's observations, the last half of the nineties might have been different--a less giddy explosion of stock market prices without the horrendous financial losses and economic dislocations that are still unwinding.
Lindsey described back in 1996 a "gambler's curse" of excessive optimism that was already displacing rational valuations on Wall Street. The investment boom in high-tech companies and the rising stock prices were feeding off each other's inflated expectations, he explained, and investors embraced the improbable notion that earnings growth of 11.5 percent per year would continue indefinitely. "Readers of this transcript five years from now can check this fearless prediction: profits will fall short of this expectation," Lindsey said. Boy, was he right. The Federal Reserve has the power to cool off such a price inflation by imposing higher margin requirements on stock investors, who borrow from their brokers to buy more shares. That is what Lindsey recommended.
"As in the United States in the late 1920s and Japan in the late 1980s, the case for a central bank ultimately to burst the bubble becomes overwhelming," he told his Fed colleagues. Acting pre-emptively is crucial; if the regulators wait too long, any remedial measure may be destabilizing. "I think it is far better to do so while the bubble still resembles surface froth and before the bubble carries the economy to stratospheric heights," Lindsey warned.
Greenspan lacked the nerve (or the wisdom) to follow this advice. The chairman did make a celebrated speech in December 1996 observing the danger of "irrational exuberance" in the stock market, but he did nothing to interfere with it. In the privacy of the FOMC, the chairman agreed with Lindsey's diagnosis. "I recognize that there is a stock-market bubble problem at this point [the fall of 1996], and I agree with Governor Lindsey that this is a problem we should keep an eye on," Greenspan said. Raising the margin requirements on stock market lending would correct it, he agreed, but he worried about the impact on financial markets. "I guarantee that if you want to get rid of the bubble, whatever it is, that will do it," Greenspan said. "My concern is that I am not sure what else it will do."
In hindsight it's clear the Federal Reserve chairman got it wrong. But his private remarks in 1996 also reveal flagrant duplicity. As the market bubble grew more extreme and many called for action by the Fed, Greenspan repeatedly dismissed criticism by explaining that raising the margin requirements would have no effect. In testimony before the Senate Banking Committee in January 2000, Greenspan said that "the reason over the years that we have been reluctant to use the margin authorities which we currently have is that all of the studies have suggested that the level of stock prices have nothing to do with margin requirements."
By 1999 the stock market was in the full flush of the gambler's curse--remember Dow 36,000?--and at that point Greenspan finally did act. But instead of tightening credit for stock investors, Greenspan proceeded to tighten credit for the entire economy, steadily raising interest rates in 1999 and 2000 until the long-running expansion expired. So did the stock market bubble (although stock prices remain very high by historical standards). Greenspan has always denied that this action was designed to target the bubble, but Bob Woodward, who wrote an admiring account of Greenspan's years at the Fed, reported that the "Maestro" was stealthily deflating the bubble by slowing the economy. Greenspan got that wrong too, since a recession resulted.
Millions of Americans are now paying the price, either as hapless investors or unemployed workers. The democratic scandal is that public officials are supposed to be held accountable for their actions, including human error. Accountability is impossible when the Fed chairman is allowed to make policy decisions in closed meetings and keep his true opinions secret for five years. The FOMC's verbatim meeting minutes should be shared with the citizens who will be affected and made available for timely political debate. When reformers get finished with the funny-money accounting at Enron, they might turn their attention to some holy illusions surrounding the Federal Reserve.
"Not over my dead body will they raise your taxes," George W. Bush cryptically proclaimed. The press dutifully translated what he really meant, but few commented on the tastelessness of a wartime leader with troops in the field saying he was willing to die for the cause of lower taxes for the wealthy.
Never mind. The President's speech had no high public purpose or occasion. It was a political document, intended to undercut Senate majority leader Tom Daschle's prescriptions for economic recovery the previous day; it had more to do with gearing up for the 2002 Congressional elections than with speeding up the economic recovery. Bush's riposte signaled that the not-so-great debate of '02 is on.
Besides standing foursquare against any tax hikes, Bush offered only the same prescription for economic recovery as he has in the past: Let those at the top of the heap keep more of what they've got. Despite a stratospheric approval rating and a nation united behind him, he reaffirmed his fealty to his corporate underwriters and offered tax cuts for the rich at a time of obscene inequality. His partisan posturing on the stimulus plan showed that he thinks the economy will recover on its own, leaving the swelling ranks of jobless folk on their own.
Although superior to Bush's package, Daschle's was securely in the lineage of Bill Clinton's efforts to be both fiscal conservative and compassionate centrist. It positioned Democrats to campaign, amid economic recession, as the hair-shirt party of "fiscal responsibility," blaming Bush's tax cuts for the vanished (and largely notional) budget surpluses and evoking public nostalgia for the giddy boom of the late 1990s, which actually began heading south before Bush came to town. Daschle's minimalist list of stimulus measures shows a party leader out of touch with real conditions who thinks this downturn is a nonthreatening event that will soon be over, just as the stock-market cheerleaders are forecasting. Wiser heads on Wall Street, however, warn that any recovery will be weak and perhaps transient.
Even if the recession proves less serious than feared, the Democrats should be advocating spending on badly needed long-term projects, from schools to railroads, while pushing for extended and expanded unemployment compensation and health insurance and aid to states hard hit by new national-security costs.
Along with this expansive agenda the Dems should overcome their timidity and make the case for repeal of the bulk of last year's Bush tax cuts, particularly those provisions that benefit the wealthiest Americans. Those cuts will do little to stimulate the economy (even if they operate as promised--a dubious assumption), since they don't take effect for another three to six years. Instead, by assuring a greater stream of revenue from those who can best afford to pay, the Democrats can help forestall inevitable GOP efforts to claim that social programs must be cut to allow for military needs, while at the same time providing funds to address housing, hunger and poverty.
Teddy Roosevelt, whose biography is on Bush's bedside table, may have been less a foe of the malefactors of great wealth than his rhetoric claimed, but he did espouse a progressive agenda of reform, which included antitrust, financial regulation, the eight-hour workday, even a living wage. And Franklin Roosevelt in 1944 outlined an economic bill of rights that would redeem wartime sacrifices and secure the gains in income of the working class. All Bush can come up with is a thank-you note for his campaign donors.
Food companies ship supplies to Cuba in the aftermath of Hurricane Michelle, in what could be the beginning of the end for the tediously long US embargo of the island country.
The connections between Enron and the Bush administration run deep—and they should be investigated.