Political Economy

The market may be down, but it's business as usual in D.C.

President George W. Bush is calling for a corporate reform bill that, among other things, would double the sentences of corporate officers found guilty of lying about the conditions of their companies. Some of the most aggressive members of D.C.'s press corps ought to be thankful their coverage of the corporate collapses isn't held to the same standard.

"The last time we faced a hangover like this one, the president didn't just talk, he acted," writes Newsweek columnist Jonathan Alter. "In 1934 Franklin D. Roosevelt created something called the Securities and Exchange Commission to regulate Wall Street." Alter went on to transcribe DNC's talking points, dutifully copied by The Wall Street Journal's house liberal, Al Hunt, and NBC's Tim Russert, among others, noting that current SEC Commissioner Harvey Pitt was unfit for the job because he "came in talking about a 'kinder, gentler SEC.'"

That Alter would compare 2002 to 1934 indicates that he's about as grounded in reality as a WorldCom financial statement. The stock market is not the economy. And the economy of 2002 is not the economy of 1934.

In 1934, one in five Americans were unemployed—and one in three for those who didn't work on farms. The real economy had contracted by 37 percent from 1929 to 1934. Although it's still disputed, many believe that it wasn't the stock market crash of 1929 that caused the Depression, but the government's response to it. A restrictive monetary policy caused banks to fail and businesses, starved for money, tanked in massive numbers.

Today, unemployment stands at 5.9 percent. There's talk of a double-dip recession, but even the first dip is now being disputed. We've only actually experienced one quarter of negative economic growth. The stock market hasn't crashed, as it did in 1929 or even 1987, when it collapsed 22 percent in a single day. Sectors that were blown up by investors who didn't much care about such things as customers, revenues, or profits have deflated over many months. The tech-heavy Nasdaq appears to be tracking the Dow of the Depression. The S&P 500, an index of 500 large companies, is way down.

But, as Newsweek's Wall Street reporter Allan Sloan notes, the pain is selective. Nearly half of the S&P's stocks were in the black for the year as of June 30. Even at this level, the S&P is very likely overvalued. Since 1929, the price-to-earning ratio—the amount of money it costs to buy a dollar of profits—of the S&P has ranged from under 6 to nearly 30. Today it stands at roughly 21. No one can say what the proper number is, but right now it's still on the historical high side. Over the past two decades, the price of stock has increased at three times the rate of corporate earnings. That can't, and won't, go on forever.

D.C.'s professional weather vanes have been tacking back and forth for almost a year now in search of someone to blame for the burst. No one likes to lose money, and when people do, even when it's their own fault, they go in search of scapegoats. By now we've completed the cycle: greedy executives, dull analysts, lap-dog accountants, conflicted and underfunded regulators, arriving back at executives. Perhaps, just perhaps, investors—caught up in a bit of greed themselves—had something to do with it as well.

Enron's collapse was predicted long before it happened by analysts and even denizens of Internet chat groups who happened to read its financial statements carefully. WorldCom finally collapsed after it got caught claiming $3.8 billion in expenses as revenues. But by that point, its stock had already dropped 99 percent, from a high of $61.47 in June of 1999 to $.83 a share. That news simply took it from $.83 to zip. The lying may have been a result of the company's collapse, not its cause.

Watching the self-important political press cover this business story offers no lack of entertainment. On Wednesday, CNN anchor Leon Harris actually asked the network's Wall Street reporter how the market could react to Greenspan's speech, as it wasn't being covered live on CNN.

The press in general, and the D.C. press in particular, is not only ignorant but often mendacious. For nearly a year, many members of the press have been treating the business story as a political story. This is especially true of those like Alter who want to stick Bush and Republicans with the business scandal. The attack has been multi-pronged, focusing on Bush's Enron connections, Bush's past business dealings, and SEC Commissioner Harvey Pitt.

Pitt, whose job it is to regulate financial markets, didn't actually call for a kinder, gentler SEC, even though Alter, Hunt, Russert, and many others reported it that way. The article that started it all was an editorial in The Washington Post that claimed, "Mr. Pitt told an audience of auditors that the SEC would henceforth be 'a kinder and gentler place for accountants.'"

But as Pitt told Russert, who admitted that he hadn't bothered to read Pitt's speech, he said no such thing. He said the SEC had not always been such a "kinder and gentler" place for accountants. That's a big difference. He also told them that while he wanted to work with them on modernizing accounting practices, "practices that reflect venality and disservice to public investors, however, will not be tolerated."

As I said at the outset, good thing such standards don't apply to the partisan, I mean, political press.