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.
Dean Baker, the author of "Double Bubble: The Over-Valuation of the
Stock Market and the Dollar" (Center for Economic and Policy Research, June
2000), is the co-director of the Center for Economic and policy Research (www.cepr.net)
Copyright 2002 Los Angeles Times
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