Radical media, politics and culture.

Turmoil - The Bear Market - Doug Henwood

hydrarchist writes"This is an edited version of comments
delivered by LBO editor Doug Henwood on his July 25, 2002,
radio show. The show is "Behind the News," Thursdays,
5-6 PM eastern U.S. time, on WBAI, 99.5 FM in New York, or on
the web.

Bill O'Reilly, host of the O'Reilly Factor on the Fox News Channel, one
of the funniest shows on TV (and not always intentionally so),
has a feature on every show called "The Most Ridiculous Item
of the Day." O'Reilly's politics are largely appalling, but
he's entertaining, and I'm going to steal this idea and begin
presenting a Most Ridiculous Item of the Week on this show. Here's
the premiere.

According to official capitalist ideology,
CEOs and other top execs deserve their enormous salaries because
they're big risk takers and because they contribute so much to
society. It's pretty well established that executive pay actually
bears little resemblance to performance - and here's an extreme
case. Neal Travis reports in today's New York Post (uh-oh,
that's my second citation in less than a minute of a Murdoch media
property - I assure you this is entirely accidental) Bob Pittman,
who's been squeezed out of a top job at the troubled media giant
AOL Time Warner, is going to leave with a $60 million-plus severance
deal. Now this is a company whose stock is off more than 80% over
the last two years - twice as much as the overall market, and
which is now under investigation by the SEC for accounting chicanery.
If you get $60 million for being part of a collossal failure,
what would the price tag be for success?

But Pittman's parting check is nothing
compared to that enjoyed by ex-CEO Gerald Levin, architect of
the merger of AOL and Time Warner that is now universally regarded
as a disaster. Levin left the company earlier this year with more
than $200 million. Nice work if you can get it.

I was thinking about potential guests
to discuss the stock market meltdown and the corporate scandals
tonight, but I was overcome by an irresistible attack of vanity,
and concluded that I could do it better than anyone. So here we

First, a measure of the damage. As of
Tuesday's closing prices, the most widely used benchmark for stock
prices, the Standard and Poor's 500 index, was off 48% from the
high it made on March 24, 2000. (The S&P 500 is a broader
measure than its more famous cousin, the Dow Jones Industrial
Average; the Dow is made up of just 30 stocks, while the S&P,
as its name suggests, is comprised of 500.) That decline a hair
behind the achievement of the last major bear market, the October
1974 low, which was off just four tenths of a percentage point
more. The Nasdaq was off 76% from its March 2000 high. Both averages
have a way to go before matching the grandaddy of them all, the
1929-32 decline, which was 82% on the S&P. The 1973-74 bear
market was the worst since the 1930s, so we've pretty much matched
that record, and I don't think the bloodletting is over yet, despite
yesterday's powerful rally and today's see-saw action. Indeed,
it wouldn't surprise me to see the Dow tack on 500 or 1000 points
over the next weeks or months. But that wouldn't change the big
picture much.

And what is that big picture? What does
this all mean? As I've said here before, in normal times, the
zig-ing and zag-ing of the stock market doesn't mean much to the
outside world. Unless it's your job, or your own money's on the
line, stocks often inhabit a world of their own, with little impact
on or relevance to the real economy. But we haven't seen normal
times, at least as far as the stock market is concerned, since
around 1996, when individuals started playing with stocks in a
big way, and the market began escaping the earth's gravitational

To imagine what effects the bust might
have, lets think back on the boom. A rising stock market can have
several economic effects. One is direct: strong markets encourage
companies to go public, meaning that the small circle of original
owners float shares in an initial public offering, or IPO. The
proceeds of an IPO generally go towards cashing out the original
investors (typically the founders and their earliest funders,
like venture capitalists), and if there's money left over, towards
investing in expending the underlying business and hiring new
workers. We saw a big gusher of that sort of thing in the late
1990s, though it's clear in retrospect that lots of those businesses,
like Pets.com, should never have been funded in the first place.
But there are also indirect economic effects. A rising market
encourages optimism, leading established businesses to invest
and hire more than they would have otherwise, and inspiring stock-owning
households to save less and spend more than they would have otherwise.
We saw lots of that too, as the personal savings rate in the U.S.
declined to near 0, the lowest level since the early 1930s, and
personal debt levels made new highs. So the rising market goosed
the real economy to levels beyond what it normally would have
managed, whatever we mean by normal.

There were more subtle effects too.
The bull market greatly raised the prestige of American capitalism
around the world; suddenly other countries wanted to be more like
us, which means with flexible labor markets and no welfare state.
Flexible labor markets is the polite way to say no job security,
no benefits, and low pay (unless you're Bob Pittman or Gerald
Levin). Millions of people came to believe that the market could
not only fund a comfortable life in the present, it could assure
a comfy retirement in the future - especially since Social Security
was certain to go broke. (Social Security is not certain to go broke, but
that's the myth.
) And people came to think that brilliant
ideas and clever branding strategies produced value in themselves,
without needing mortal human workers, because the stock market said so.

So let's throw that all into reverse.
Falling markets mean very few IPOs, choking off funding for new
businesses to expand and hire, and depressing what Keynes called
the animal spirits of entrepreneurs, putting them in the mood
for retrenchment, not fresh undertakings. Households who thought
they were getting richer suddenly feel poorer - much poorer -
and spend less and borrow less. Prudent for individuals, yes,
but not so good for an economy dependent on high, even excessive,
levels of consumption. Workers who were close to retirement are
now having to re-evaluate their plans; those who thought they
could retire at 60 or 62 may find themselves working until they're
70 or older. Also, governments at all levels are experiencing
much lower tax collections, in part because of economic weakness,
but also the direct result of lower stock prices; service cutbacks
are inevitable, especially here in New York City, where the economy
has never been so dependent on Wall Street. One bright spot, though,
is that the global prestige of U.S. capitalism is taking severe
hits, which is what it deserves.

There are also more subtle messages
in the market's steep decline. As I've been saying here, it's
extremely unusual for the stock market to fail to respond to the
stimulus of lower interest rates, as engineered by the Federal
Reserve. Normally, a generous Fed inspires strong stock markets,
not once-in-a-generation declines. But that's what we've gotten.
The only precedent for this behavior is the 1930-31 period, when
the Fed was actually less aggressively indulgent than it has been
over the last year and a half. And though by most measures it
looks like the recession ended last December or January, the market's
not acting like it; this is the only post-World War II recovery
in which the market has fallen rather than rising smartly.

Why should this matter? For several
reasons. The market does have a pretty good record of anticipating
major turns in the economy - not every squiggle, for sure, but
major trends. And there are several reasons for that. One is that
the market is a measure of liquidity in the system - how much
spare cash is floating around. If there isn't much spare cash
- if cash is all devoted to paying basic expenses and servicing
debts - then the market may be weak. But the market is also what
pollsters call a "feelings thermometer" for the investing
class - a measure of how flush and optimistic people with money
feel. Since they're the ones who ultimately determine what's produced
by whom, if they're not feeling so good, the rest of us will feel
the effects.

When the stock market kept declining
in the early 1930s, it was a sign that a deflationary depression
was underway. I'm pretty confident that a collapse of that sort
is impossible today - government is just too big for the whole economy
to implode. But what we've seen in Japan
over the last 10 years may be a taste of how a deflationary depression
operates today - a long period of economic stagnation and increasing
social stress. There's that possibility - or for another precedent,
there's the economy of the 1970s that followed upon the last great
bear market. That was inflationary rather than deflationary, but
it was also a time of high unemployment, falling real wages, and
mass alienation. I don't know what form this bust is likely to
take, but I'm pretty sure we've entered a period of economic troubles.
For a decade, the U.S. economy chugged along while the rest of
the world experienced stagnation or worse. I'm pretty sure that
phase of American exceptionalism is behind us. I don't know what's
coming next, but it's probably not good. Which is why it's essential
for leftists or progressives or radicals or whatever we call ourselves
to get out there and explain what happened to the public and organize
against the austerity, crackdown, and reaction that generally
accompany bad economic times.

A final point. Many Wall Street types
are talking about a "disconnect" between the market
and the real economy. Yes, the real economy is doing a lot better
than Wall Street, at least for now. But they never talked like
this on the way up. On the way up, the rising market was proof
that everything American finance and industry did was right and
great. Now we know that a lot of those heroic financiers and industrialists
were crooks, and the rest were in the grip of manic self-deception.

Related to the disconnect argument is
another frequently on the lips (or typing fingers) of pundits:
the U.S. is nothing like Japan ten years ago. Our economy is fundamentally
stronger and more "flexible" (that word again) than
theirs. But there are other differences too. Japanese households
were big savers, not borrowers; today, U.S. households owe record
amounts of money to their creditors. Japan was (and remains) a
giant creditor on the world scene; the U.S. today, a giant debtor.
So those are also ways in which the U.S. is no Japan, though ways
less flattering to us.

And let's revisit the late 1980s for
a moment. Then, it was a commonplace that the U.S. was washed
up and Japan was poised to take over the world. That aura of invincibility
turned out to be a byproduct of Japan's great speculative bubble.
It may be that the notion of the fundamental greatness of the
U.S. economy is the last surviving byproduct of our own bubble."