Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Did someone say "Abbey"??...
Bubble Pundit Watch
Outstanding Accomplishment Demands Recognition
Posted: December 29, 2000
http://www.itulip.com/awards.htm
We've still got Cramer, but where have all the other hucksters gone??....
Off counting their money in a dark alley somewhere?..
Have a great day, all! ;)
But is a weak dollar good for investment? A tanking dollar and dropping stocks is a double whammie for our friends across the pond....For years investment flowed into US asset markets. We now see net outflow.
Is a weak dollar better in the longer term? Maybe....
But, imo, it's not good for stocks - now.
But now is a time for correction, to correct imbalances & unwind excesses, and that'll happen in spite of Mr Greenspan and the powers that be.. Real correction is a process.... They can build dams and try to stem tides but water (like markets) finds it's own level....ultimately.
Time will tell how, and where, this secular bear ends.
I think a swimming pool analogy is appropriate.
Liquidity is like using a garden hose while the filter is on backwash. The net effect is a drain, and so goes the stock market over the last 2+ years...
With confidence being what it is, I don't see a reversal any time soon. But heaven knows I've been wrong before. So, we shall see....
AG has been providing life support to the equity markets for quite a while now. Given the performance of the US$ one can assume Easy Al's liquidity flow has reached the point of diminishing returns. Greenspan finds himself in a real catch 22 situation, of late. Injecting liquidity to aid equities weakens the dollar, which hurts stocks, and it all becomes very circular. Kind of lends new meaning to the old mantra, "Don't Fight the Fed!".
Easy Al & money flow: http://app.ny.frb.org/dmm/mkt.cfm
Bush: Cheney, Oil Co. Did No Wrong
17 Jul 2002, 10:15pm ET
E-mail or Print this story
- - - - -
By RON FOURNIER AP White House Correspondent
WASHINGTON (AP) - President Bush said Wednesday he is confident an inquiry into Dick Cheney's former oil company will exonerate the vice president, drawing swift criticism from Democrats who said Securities and Exchange Commission investigators may be influenced by the president's prediction.
As a string of corporate scandals loomed as a major political issue, Bush shrugged off calls to have the SEC release files from its decade-old insider-trading investigation of Harken Energy Corp. - the president's former oil company.
``There is no case,'' said Bush, a former Harken board member. ``It was fully investigated by career investigators.''
Shifting the subject, the president said: ``The key thing for the American people is to realize that the fundamentals for economic vitality and growth are there.''
The White House has been dogged in recent days by questions about an old SEC investigation into Bush's $848,000 sale of Harken stock, a case that was dropped in 1991. The SEC is currently investigating the Dallas-based Halliburton Co.'s accounting practices when Cheney was its chief executive.
Asked if he was confident the SEC would find Cheney did nothing wrong, Bush replied, ``Yes. I am'' and called the vice president a ``fine business leader.''
Until the news conference, the White House had diligently refused to comment on the Halliburton inquiry to avoid being accused of trying to influence the independent agency. Cheney himself has not discussed the SEC inquiry.
``Bush has blown Cheney's cover,'' said Democratic National Committee spokeswoman Jennifer Palmieri.
``The whole White House strategy for protecting Cheney has been to refuse to answer any questions on Halliburton. For Bush to clear him from the podium blows that cover,'' she said. ``And what kind of message does it send to the SEC when the president of the United States says, in effect, there is nothing to investigate?''
Bush did not respond when asked whether Cheney should go public about his business dealings.
He grudgingly addressed the Harken and Halliburton cases in a joint news conference Polish President Aleksander Kwasniewski, who was rewarded a rare state visit for his staunch support of U.S. foreign policy.
``America and Poland see the world in similar terms. We both understand the importance of defeating the forces of global terror,'' Bush said, flanked by his counterpart in the East Room ceremony.
Kwasniewski replied, ``We want to reconfirm our readiness to continue this combat.''
On other subjects, Bush:
- Renewed his call for new leadership for the Palestinian people, but did not answer a question about whether a compromise could be reached to give Yasser Arafat a figurehead position in a new Palestinian government. Secretary of State Colin Powell has suggested he is open to the idea.
- Sought to quell European concerns about potential U.S. military conflict with Iraq. ``We don't necessarily place one aspect on the war against terror as more important than the other.''
- Said the long-term cost to run his proposed Homeland Security Department is ``going to depend upon how effective we are at defeating the enemy.'' He acknowledged that some states will have trouble paying their share of new homeland security costs, but predicted that their situation will improve as the economy prospers.
The Harken and Halliburton investigations pose a political problem for Bush as he tries to shield himself and his party from fallout over a string of corporate scandals.
He has urged corporate America to adhere to the highest ethical standards, and has proposed stiff new penalties for wrongdoers.
Democrats hope to convince voters that Bush and Cheney were involved in the same types of business dealings they now denounce.
``They can't hide from their own business records,'' the Democratic Party spokeswoman said.
Bush said the SEC has released key documents under Freedom of Information laws. However, the SEC continues to withhold a wide range of internal investigative documents in the probe.
The SEC closed the Harken case in 1991 without taking any action against Bush. The SEC found that Bush had known of only $4 million of a $23 million loss the company announced two months after he sold his stock.
Congressional Democrats have said they may hold congressional hearings into accounting at Halliburton Co., when Cheney was chief executive of the oil equipment company.
A watchdog group, Judicial Watch, has filed a shareholders lawsuit alleging that Halliburton overstated revenue by $445 million from 1999 through 2001. The suit suggests that Halliburton's accounting practices resulted in an overvaluation of its shares.
The group condemned Bush's defense of Cheney, calling it ``inappropriate and improper.'' ``President Bush's comments are a signal to the court in our case and to the SEC to give the vice president a pass for any alleged wrongdoing concerning Halliburton,'' said Judicial Watch President Tom Fitton.
``I've got great confidence in the vice president,'' Bush said. ``He's doing a heck of a good job. When I picked him, I knew he was a fine business leader.''
On the SEC inquiry, he said, ``That matter will run its course.''
- - - - -
E-mail or Print this story
FORTUNE Exclusive: Workings of Harken Energy Investigated; Editor-at-Large Andy Serwer Looks At Unanswered Questions and Mysterious Dealings
18 Jul 2002, 6:34pm ET
E-mail or Print this story
- - - - -
NEW YORK--(BUSINESS WIRE)--July 18, 2002--Despite all the recent
interest in President Bush and his past dealings with Harken Energy
Corp., the company is still shrouded in mystery. FORTUNE
editor-at-large Andy Serwer looks at some unanswered questions and
reports on what became of Harken after George W. Bush left the
company. The story appears in Serwer's "Street Life" column, available
at www.fortune.com as of 6:00 p.m. today.
Harken, a Houston-based oil and gas company, was in declining
health even when Bush sold his stock in 1990, and is in even worse
shape today, according to Serwer. The company lost hundreds of
millions of dollars over the past half decade, and its stock now
trades for just pennies. Its CEO, chief accounting officer, and CFO
all worked in the energy audit division of Arthur Andersen. And
continuing a practice that was in place when Bush was on the board,
the company made loans--and has forgiven at least one of them--to
senior management and directors.
Bush joined the board in 1986, and in 1990 sold 200,000 shares of
his stock, pocketing $850,000, just before the stock dropped from $4 a
share to $2 by year's end. He neglected to file a required form with
the SEC until months later.
After Bush left in 1993 to pursue his political career, the
company pursued a variety of deals to jumpstart its operations, but
without much luck. "Harken, now a tiny, highly leveraged company, has
dozens of operating subsidiaries and a tangle of financial
statements," says Serwer. In a complex series of transactions, Harken
recently moved its South American operations into a 92% owned British
company called Global PLC. And despite a reverse stock split in
2000--intended to boost its stock price--the company, which once had a
market capitalization of hundreds of millions of dollars, is now worth
only $8 million.
Other big names besides Bush have been involved with the company,
including investor George Soros, former Republican Congressman Michael
Huffington, and Wall Street big shot Geoffrey Boisi. "There's lots
more here to be unraveled," says Serwer, "Meanwhile in the White
House, President Bush probably wishes Harken had either been bought,
died, or just disappeared long ago."
CONTACT: FORTUNE
Caroline Plauche, 212/522-2134
or
Carrie Welch, 212/522-6724
or
Jenna Landry, 212/522-4269
KEYWORD: NEW YORK TEXAS
INDUSTRY KEYWORD: ENERGY GOVERNMENT INTERNET PUBLISHING
SOURCE: FORTUNE
Today's News On The Net - Business Wire's full file on the Internet
with Hyperlinks to your home page.
URL: http://www.businesswire.com
Copyright 2002, Business Wire
- - - - -
E-mail or Print this story
Bahrain Project Helped Harken Stock
20 Jul 2002, 1:05pm ET
E-mail or Print this story
- - - - -
By PETE YOST Associated Press Writer
WASHINGTON (AP) - Five days after former President Bush was inaugurated in 1989, an official from Bahrain set in motion a chain of events that allowed the Texas oil company where the president's son was a director to beat out Amoco for drilling rights with huge profit potential.
George W. Bush was on the board at Harken Energy Corp. when the company won the right to drill for oil off the coast of Bahrain, a tiny Persian Gulf island.
There is no evidence the country was trying to curry favor with his father's administration when it turned away from a major U.S. oil company in favor of Harken. Board member Bush opposed the deal.
In the end, the project was a bust. But it helped keep Harken's stock price in reasonably good shape for a few years - and in so doing, helped Bush when he came under investigation for insider trading. The Securities and Exchange Commission took no action against him.
At the time of the Bahrain project, Bush sold most of his shares as Harken tried to weather financial problems. Bush's sale drew the SEC's attention because the trade was reported eight months late to regulators.
Bush's years as a Texas businessman have come under renewed scrutiny recently as he tries to restore confidence in financial markets hurt by business scandals.
Despite Harken's continuing financial losses in 1990, minutes of a Harken board meeting attended by Bush show that the company's investment banker, Chad Weiss of the firm Smith Barney, said the Middle East drilling venture would keep the company's stock price up.
``The potential of the Bahrain prospect will be the primary driving force initially for the company's stock,'' according to the minutes of a May 1990 meeting. ``With the prospect of Bahrain in the picture,'' the investment banker ``did not see much downside for the price of the stock.''
Worried board members had asked the Smith Barney representative whether the stock price would be hurt in carrying out the drastic step of splitting Harken into three separate companies.
Harken's stock price stayed strong, though volatile, despite an unprecedented $23 million loss two months after Bush sold 212,140 shares for $848,560.
The SEC cited the stock's rebound after a one-day drop in deciding there was no case against Bush for possibly profiting from inside information. In the absence of a drop in the stock price, the SEC concluded other investors did not view the $23 million loss as important, making any advance knowledge of the loss by Bush irrelevant. The SEC also concluded Bush had little advance knowledge.
Ten days after reporting the huge loss, Harken stock was selling for $4 a share, the same price Bush had sold it for two months earlier.
In recent weeks, Bush has responded to criticism of his sale by noting that the stock price doubled a year later. A key factor in that showing was that Harken and a company owned by the billionaire Bass brothers of Texas were working on the Bahrain project amid high expectations.
The Basses' was among 25 oil companies that Harken said lined up at its door after it won the Bahrain concession. Harken announced the good news that it was teaming up with Bass the month before Harken reported its $23 million loss.
The Bahrain project literally landed in Harken's lap.
On Jan. 25, 1989, Bahraini minister of development and industry Yousef Shirawi contacted a respected retired American oil executive, Mike Ameen, and asked him if there was a small American company interested in drilling off the coast of Bahrain. Amoco wanted to drill in the same area.
Later, Ameen, who did not know about Harken, mentioned the Bahrain project to investment banker David Edwards of Little Rock, Ark. Edwards had worked with Harken for several years and suggested the Texas firm. Ameen helped negotiate a deal.
The U.S. ambassador to Bahrain at the time, Charles W. Hostler, said Friday that ``an important factor in this relationship is Mike Ameen, who knew well the key figures and spoke their language after a lifetime of activity in that part of the world in the oil business.''
Shirawi has said that he had not known Harken's name and that he did not find out until later that Bush was connected with the company.
According to people familiar with the matter, Bush opposed the Bahrain venture because of Harken's total lack of experience in Middle East drilling.
In a letter on Bush behalf written during the 2000 presidential campaign, his lawyer, Robert Jordan, wrote that ``at no time'' did Bush ``discuss Harken's interests in Bahrain or any other Harken business with any member of the Bush administration. He did not favor Harken's decision to seek a drilling concession in Bahrain.''
Jordan is now U.S. ambassador to Saudi Arabia.
After Bahrain awarded the concession, Amoco executives went to the U.S. Embassy in Manama to express their ``puzzlement'' over how they lost out to the much smaller Harken, according to a State Department cable from 1990 released under the Freedom of Information Act.
``Amoco officials were apparently unaware of the role'' that Ameen ``played in securing the contract for Harken, although they had heard that there had been an unknown middleman involved,'' said the cable.
- - - - -
Zeev: I don't see the market sustaining a worthwhile uptrend with the dollar bleed being what it is. I believe foreign investment in US assets is still at historic highs, but that trend seems to be reversing. This is foreign flight too. With the market's and US$ in a downtrend, Easy Al's hands seem to be tied. Mainstreet is disgusted with Wallstreet so who buys the pump effort?
A sustained rally requires the flow of new money and I don't know where that money will come from, unless Easy Al just keeps printing....But that appears to have become counterproductive.
Double Bubble
http://www.cepr.net/columns/baker/double_bubble.htm
An oldie, but still an appropriate analysis.
LG: If you are referring to my "investor confidence" post as being inappropriate, I do apologize. IMO, because market issues have come to the forefront of public concern, politics du jour is about the stock market, at least for now, until something else steals the show.
Unfortunately too, the situation that ails the market appears to be a systemic problem, enabled by the SEC and funded by soft money from Wall St, the accounting industry, and companies themselves. Because politicians chase pop concerns, it's tough to separate politics from the market.
But again, if my post offended you, I apologize.
Here's the link:
http://www.saavycharts.com/
shtirlitz: If we're looking at a broad based multiples correction, nothing is cheap. I've been looking, but I haven't seen anything cheap enough to consider a value, longer term. By any historical standard, the market is still richly priced.
Clearstation's ace chartist, "cybersaavy", see's 3500 to 4500 as a final resting place for DJIA, retracing all post 1995 mania gains. I was thinking somewhat higher, but I'm no master charter. I'll post a link to cybersaavy's work. It's excellent!
Good luck and good night all.
Granted the bubble didn't happen on Baby Bush's watch, but GW scares me. The "investor confidence" speech he delivered this week reminded me of Papa Bush's 1991 speech on "consumer confidence". (Remember the "it's the economy, stupid" speech that was the beginning of the end for hopes of a second Bush term?) IMO, Junior is a Lame Duck as was the father. It seems the Bush family and economics mix like oil and water, and when young Bush speaks the market drops. So much for investor confidence in business or government, like Japan.
Oddly, Bush & Bush remind me of Duke & Duke of 'Trading Places'.....
Zeev: You are more confident with individual stocks now than index tracking stocks? My fear with individual stocks is the next fraud blowup, so I avoid. Currently long USPIX and BA, bought post 9/11. That's it!
Good luck to you.
Hunch: Once lost, confidence is tough to regain.
http://cbs.marketwatch.com/news/story.asp?siteid=mktw&dist=mktwsnap&guid=%7BBBEF35D0%2D52F8%...
Rebuilding trust is a process, and a long one at that.
Richard Hahn has also been a master of late. Fleck has always been worthwhile, IMO. Gilder! Now there's a blast from the past. How many of his tech picks did not/will not go bust??
How many Gilder subscribers remain? ;)
IMO, the market has more work on the downside, for a myriad of reasons such as valuation, confidence, questionable macro picture, etc.
Be it not for Greenspan and his financial wizardry, the market would have tanked already. Interesting to think of how history will remember Mr.Greenspan...
I think shorts can sleep easily, tho there'll be blips in the charts. The downtrend continues with lower highs and lower lows.
Actually, thank heavens for the shorts. Someone has to buy this market!..
Wizards of Money Part 10: Back to the Twenties Through the Looking Glass - Steagall
1. Introduction to Wizards Episode 10
2. Regulatory Landmarks of the Great Depression
3. A Trip Back to the 1920s
4. FEAR and BANKERS
5. The Gambling of the Guardians of the Public's Money
1. Introduction
This is the Wizards of Money, your money and financial management series … but with a twist. My name is Smithy and I'm a wizard watcher in the Land of Oz.
This is the tenth edition of the Wizards of Money and it is entitled "Back to the Twenties Through the Looking Glass - Steagall".
In this the 10th edition of Wizards we are going to take a look at the parallels between current times and the late 1920s - the period just before the great stock-market crash of 1929 and the subsequent Great Depression. We will see how it is that much of the regulation implemented during the Great Depression to address the wild and unregulated behavior of big business during the twenties has now been dismantled through de-regulation. Despite industry claims that such regulation is out-dated and no longer needed for our fancy modern markets, we will see that, not surprisingly, the dismantling of this regulation has once again given rise to exactly the dangerous market behavior it was designed to stop.
Excerpt FDR Inauguration Speech 1933 - Reign in Bankers
This excerpt from FDR's 1933 speech helps remind us of a time when financial collapse caused by unchecked and unregulated behavior of Wall Street gamblers forced America's political leadership to publicly recognize the danger such activity poses to the public as a whole. But how easily we forget these things. In the wake of the undoing of what became regulated during the FDR administration the same old players are back to their same old tricks of the twenties. Hardly discussed in all the coverage of the Enron Saga of the early 21st century is the discovery of the extent of the wild and risky behavior of the biggest federally insured banks in the US - JP Morgan Chase and Citigroup. If their involvement in financing various Enron activities is an indication of their wheeling and dealing more broadly then we have a lot to be worried about at the heart of the financial system.
In this highly deregulated market it is appropriate to look at the implications for another 1929-style crash and the potential for a financial collapse. The 29 Crash followed the high stakes risk-taking of lightly regulated powerful industries. One must consider - Would a financial collapse of this scale be a good thing? - by being possibly the only way to change the global order? Or would the first such collapse in the nuclear age bring more violence and destruction than any of us ever thought possible? Of course nobody can answer these last two questions with any certainty, but it is very important to consider what might go into the makings of a global financial collapse and to plan for what is eventually going to happen anyway. It is not a question of whether or not it will happen - as all financial systems eventually collapse, but the question is - when.
To go on this journey we will hear some speeches from important figures from this time and we will also visit with some people that actually lived through the twenties and are still able to tell us about it today.
2. Regulatory Landmarks of the Great Depression
The Great Depression brought with it numerous regulatory landmarks that stayed with us for a long time. Let's just talk about a sample of four of the major areas and the status of them today:
Utilities Regulation: In 1935 the Public Utilities Holding Company Act or PUHCA was introduced to provide national supervision of the gas and electricity utilities in order to prevent their excesses of the 1920s. In the twenties big utilities had been buying up smaller ones, hiking up consumer prices, expanding into unrelated businesses, loading up on debt, hiding losses from investors, and milking their subsidiaries and affiliates to prop up their own earnings. Sound familiar? Many people have reminded us of this law in the aftermath of the Enron collapse and Enron's various exemptions from it amidst recent recommendations by everyone from the Senate Banking Committee to the SEC to have this law repealed.
Exchange and Accounting Regulation: The Securities and Exchange Commission (or SEC) was established in 1934 under the Securities Exchange Act. During the 1920s there was effectively no Federal oversight of the securities markets, and with the market rising in the 1920s, and banks more than willing to lend for stock speculation, this created a recipe for disaster. The SEC was created to oversee market players in the securities markets and to require truthful quarterly reporting from publicly traded companies. By 2002 the effectiveness of the SEC in enforcing "truth in reporting" is highly questionable as we have seen. This is in part due to conflicts of interest rife throughout the financial world but also due the sheer complexity of financial transactions available to all companies and the absence of regulation on the most risky of financial transactions - those called derivatives trades.
The Social Security Act: Before the Great Depression there was no federal safety net for unemployed, disabled or retired persons. As often happens today the safety net was usually picked up by various charities and religious organizations. But this safety net collapsed during the Great Depression because of the collapse in confidence in the financial system. By necessity and through public pressure that had built up over the years the Social Security Act was born in 1935 and provided for old-age and unemployment benefits. Today, of course, this depression era safeguard is under attack with financial companies pushing for its privatization.
The Heart of the Financial System: Finally the big one - the regulation of the system that stands at the heart of the entire financial infrastructure - the banking system. The big act affecting the banks and securities dealers was the Glass - Steagall Act of 1933 that brought radical changes and better supervision to the banking industry. This act separated deposit banks, where depositors expect to safely park their money, from more speculative players such as securities dealers and investment banks that could make depositors' money disappear through careless gambling - and did exactly this in the 1920s. The Federal Depository Insurance Corporation or FDIC was set up in 1933 to provide insurance on depositors' funds in the event of bank failure. This was necessary to restore confidence in the foundations of the monetary system - the banks - that had just seen run after run, failure after failure, and depositors had seen their money disappear right before their very eyes.
Interestingly, also at this time, various controls and regulations were put on the Savings and Loans institutions. This was all to be undone when Ronald Reagan began his de-regulation kick in the 1980s. As we now know the undoing of these regulatory checks and balances precipitated in the Savings and Loans debacle of the 1980s that could have brought down the world financial system, except that the US taxpayer saved the day with a high priced bailout. That is what Federal Insurance means - backed by the US taxpayer. With the repeal of Glass-Steagall protections in 1999 nobody seamed to have remembered the lessons of the 1980s, let alone the lessons of the 1920s!
These regulations of the banking system - the heart and soul of the financial system - will be the focus of our show today. We will see how the gradual dismantling of them over the past 20 years, since Ronald Reagan took office in 1980 and culminating in the complete repeal of the once mighty Glass - Steagall Act in 1999, is sending the banks straight back to be bigger reflections of their 1929 former selves. Whatever are the implications of this? As already noted a glimpse at what the future might hold already leaked out amidst the Enron crisis. We are only just starting to understand the extent of the involvement of big federally insured banks in this scandal, notably JP Morgan Chase and Citigroup - both of whom were able to form banking and securities trading conglomerates after the repeal of Glass - Steagall.
3. A Trip Back to the 1920s
Much of the source material on the 1920s used for this episode of Wizards is actually from the web-site of the Library of Congress. This site has a very extensive selection of original documents scanned into electronic files and posted to the Web. For the 1920s era there is a fascinating collection called "The Coolidge Era and the Consumer Economy" and links to this are posted to Wizards of Money Web site at www.wizardsofmoney.org
Link to the Library of Congress 20s collection http://memory.loc.gov/ammem/coolhtml/coolhome.html
Now let's get in our time machine and go back to the 1920s…
Excerpt - Einstein Speech…Language, Science and Goals
This is a rare recording of Albert Einstein. I inserted these words from Einstein because, of course, Einstein was becoming a very famous person in this period known as the Roaring 20s and he was traveling in the US to explain his amazing Theories of Relativity. These theories made him the premier Time Traveler of Western History. In particular, his Special Theory of Relativity provided the Western world with a radical new look at the concept of time, and it implied strange time travel and time-space paradoxes. He notes in this speech the role that science plays in the world, and that it is leaders who set the goals and priorities first and science that follows, rather than the other way around.
Now imagine we are back in the twenties … World War I is over, the Republican Harding is President and the decade started glumly with what is known as the Agricultural Depression.
Radio was the new mass communications medium of the 1920s. The Westinghouse Company launched the first radio station KDKA in 1920 in Pittsburgh, Pennsylvania. Radio brought with it great promises as the medium for free speech and democracy … but these promises were never fulfilled in the twenties, as we shall see.
Campaign finance and corruption scandals rocked the Harding administration, the most famous being the Teapot Dome Scandal, whereby government officials had secretly leased public oil-fields to private interests in return for cash and other favors. Harding had an unfortunate incident with some foodstuffs in 1923, he dropped dead and Calvin Coolidge became president and served as such until 1928.
The Coolidge Administration favored deregulation, industry self-regulation and brought in tax cuts to stimulate spending.
ATT, NBC, and CBS built huge radio networks across the country that grew rapidly in the last half of the decade. These networks were all supported by advertising revenue and this tended to "dumb down" the content so as not to offend the major revenue sources.
The public relations industry and major corporate propaganda campaigns were launched. Spearheading much of this activity was a man named Edward L Bernays who wrote extensively on "The Business of Propaganda" and helped Coolidge get elected in 1924. Advertising in newspapers and radio claimed unprecedented proportions of print-space and airtime.
Various movements to encourage ever more spending were launched - such as the Better Homes Movement, and various targeted Women's and Negro consumer campaigns were launched. Marketing specifically to children kicked off with the first annual Macy's parade in NY in 1924. Target marketing statistical analysis reached new levels of sophistication with the introduction of the punch-card system.
America had reached new and amazing heights in consumerism!
Popular radio shows, the new talking movies and song/dance combos such as the Charleston engaged millions and helped the decade become known as the "Roaring 20s."
The Chain Store was born. Sears, Roebuck and Company opened 324 stores nationwide between 1925 and 1929. Woolworths, Krogers, JC Penney, and Walgreens all spread stores all over the country. Many loved the convenience but hated that the small local merchants were forced out of business.
The stock market climbed to new heights in the late 1920s, the ordinary American was encouraged to invest their savings in the stock market and more Americans owned stock than ever before. At the same time the proportion of Americans on incomes below the poverty line continued to increase so that this proportion reached almost 50% by 1929 by some accounts.
Campaign finance was out of control with large companies like Dupont and General Motors giving lavish contributions to both parties. In a magazine called "The Forum", in a July 1929 issue, a man called Norman Thomas wrote an article called "Plutocracy in the Saddle" about business domination of government and calling the two party system the Tweedleduplicans and the Tweedledeemocrats. He also went on to say about this system of two parties in the pockets of big business "This is immensely better than having one dictator who might get shot or one party which might provoke a rival organization based on principle. Two parties to stage a good show annually and a roaring circus every four years to divert the people - what could be better? … A devout and reasonably shrewd "captain of industry" who does not daily thank God for this great gift of two parties, both his for the campaign contributions, is an ingrate. … Indeed its more sophisticated leaders may sometimes reflect how much better it is to teach people how to read and then give them what they should read, let them vote but control the parties through which they vote, [rather] than, like the stupid Czar of Russia, to try to keep the masses illiterate and voteless."
In the latter half of the 1920s the Public Utilities were consolidating like crazy through a handful of holding companies, and in the process were raising consumer prices. As people found out later they were also taking on huge amounts of debt, overvaluing assets and hiding losses from investors.
Corporate profits were soaring throughout much of the twenties generally thought to be due to increased consumer spending, credit availability and increased efficiency.
But there was a large part of this story not being told lest it would offend the advertisers providing the revenue to the radio stations and newspapers. This was that of the conditions and wages of the non-union workers in the many factories - such as garments, candies, and so forth. In general union membership declined drastically during the 1920s.
There were sweatshop activists in those days too. You can find some of their reports online at the Library of Congress website. In one report by the Consumers League of New York entitled "Behind the Scenes in Candy Factories" you can read about the appalling conditions of women who worked in these factories and the wages of around $10-12 a week, which was considered well below a livable wage. The authors actually went to work in these factories in order to learn about these conditions. There were also reports documenting abuses in the garment industry and a campaign to encourage labeling of garments with the conditions they were made in. This was all in stark contrast to the glamorous images of these products portrayed in never ending streams of advertising.
A network of consumer activism popped up around the country much of which was spearheaded by a Nader-type by the name of Stuart Chase. In 1927 he co-authored a large study called "Your Money's Worth" documenting the shoddiness of many mass-produced products, the false claims in advertising and the trend for producers to make sure products would be replaced at frequent intervals. Comparing the consumer to Alice in a nonsensical Wonderland he found advertising industry correspondence with corporate clients that boasted that only 25% of purchases are based on real need - the rest are the product of "salesmanship".
On the financial side, Andrew Mellon was Secretary of Treasury for the whole decade. He was also one of the original founders of ALCOA - the Aluminum Company of America - exactly where our Treasury Secretary of 2002 - Paul O'Neill - is from. And O'Neill is spookily sounding a lot like his predecessor of the 20s!
A fellow named Benjamin Strong, a Morgan man, was the Director of the Federal Reserve Bank of New York at the time. His informal and totally private agreements with the head of the Bank of England, Sir Montague Norman, to help England stay on the gold standard led the Federal Reserve to make harmful interest rate cuts in 1927 that created excessive stock market speculation. This played a large part in the severity of the ultimate crash. This dealings between Strong and Norman are documented in the diaries of Federal Reserve Board member Charles Hamlin which are also readily accessible on the Library of Congress web site.
The British economist John Meynard Keynes was very critical of this move of England back to the Gold Standard saying that "In truth, the gold standard is already a barbaric relic." This is because the gold standard forced prices and wages to be set by international traders and speculators, rather than the needs of workers and consumers. Today, these are still set by international speculators in our current environment of free capital flow and domination by a single reserve currency - the USD.
This move by the Federal Reserve in 1927 to lower interest rates to help England stay on the gold standard encouraged stock speculators to borrow money at these low rates from the banks and then plow these borrowed funds into the stock-market. The banks themselves were engaged in a lot of these speculative activities because many of them also operated investment banking and brokerage businesses. This speculation continued until 1929 when in August the Federal Reserve raised interest rates.
Stock prices reached their peak in September - the Dow Jones Index having doubled in just over a year. But then with the higher interest rates on borrowed speculative funds and nervousness that stocks were overvalued, stocks started falling in October. Banks started calling in the loans used to buy stock. On October 29, 1929 (Black Tuesday) the Dow-Jones Industrial Index crashed enough to wipe out this doubling of the Dow. The Dow and the markets as a whole started on a downwards spiral that bottomed out in 1932. Many people just couldn’t pay off their loans and banks started going bankrupt all over the place from this and from the collapse of their own stock investments. There was at this time NO Federal Insurance of bank deposits and people saw not only their stock markets investments disappear, but also their bank accounts vanish. For, even under the gold standard, bank money is nothing but the confidence that it can be used in trade. When that confidence disappears, so does money, and so does everything you worked for and transferred into those mysterious make-believe credits. If you need to refresh you memory about why money is simply an abstract notion and how it comes into existence - you can revisit Wizards of Money Part 1 entitled "How Money is Created".
America was still on the gold standard. So compounding all these problems the massive loss of confidence in the banking system caused the worst thing of all for the financial system - a run on banks - with people wanting to redeem their bank deposits and Federal Reserve Notes for gold. But of course there isn't enough gold under fractional reserve banking and such a run on banks will always collapse it. Expectation of bank collapse is a self-fulfilling prophecy, as it is with the stock markets, and as it is with any currency.
When you have such lost confidence in the financial system, where there has just been complete dependence on it, the whole monetary system collapses - money disappears because all it was was confidence anyway. Everything - markets, trade, business, work - it all starts to grind to a halt.
The financial house of cards collapses. And should we be afraid of what is - well, just a pack of cards?
Excerpt - Alice and The Pack of Cards
4. FEAR and BANKERS
Herbert Hoover was President at the time of the 1929 Crash. In the subsequent depression neither his administration nor the Federal Reserve did very much to bring the country out of the depression. This helped to get FDR elected and he took office in 1933.
As history goes whenever a famous leader says something really important about big business it doesn't get remembered very well. Instead the large corporations who run the networks seem to have an uncanny knack of extracting only the short phrases that don't hurt revenues and playing them over and over again so that nobody will remember the important things that were said about their advertisers.
And so it was with the FDR inauguration speech of 1933 where every man and his dog remembers:
"The only thing we have to fear is fear itself".
But how many people remember the other parts of the speech where FDR is talking about the bankers and the Wall Street speculators? Such harsh criticism of the Wizards has never been heard since from an American President!
I will play excerpts from this speech about the Wizards, but since the sound recording quality is so poor I will then repeat these sections.
Excerpt from FDR 1933 Speech:
" And yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply.
Primarily this is because the rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.
True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They only know the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.
Yes, the money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.
Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and the moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days, my friends, will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men.
Recognition of the falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing. Small wonder that confidence languishes, for it thrives only on honesty, on honor, on the sacredness of obligations, on faithful protection, and on unselfish performance; without them it cannot live."
"And finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency."
And so the process for implementing regulation to provide checks and balances and bounds on the markets began. For it is only after such a collapse that the Wizards actually realize that their success in their own game does ultimately depend on the people's willingness to play in it. The regulatory blitz included all the landmark laws described above plus many more. The regulations, of course, started first and foremost with the Rulers of the Exchange of Mankind's goods and the Money Changers in their Temple.
The 1933 Glass-Steagall Act built a wall between banks - which are essentially the guardians of the publics money and the brokers and investment banks - who are the primary gamblers in the exchanges. This would prevent privileged bankers from gambling with other people's money to make profits for themselves. Glass-Steagall also separated these institutions from insurance companies who took on a completely different set of risks.
To restore confidence in the banks and therefore rebuild the monetary system 1933 also saw the birth of federal deposit insurance under the FDIC or the Federal Depository Insurance Corporation. This insurance would guarantee that depositors would get all or most of their money back in the case of bank insolvency. It was realized that this insurance created a moral hazard for banks. Because deposits were backed by the Federal Government banks had more of an incentive to take more risks. They could get more deposits by promising a higher return to depositors. With this money they could invest in riskier higher return assets to get higher profits and the depositors wouldn't be too worried about this because they knew there was federal insurance on their deposits. This realization brought in a law that forbade paying interest on checking accounts so that banks couldn’t do this. The separation of banks and other financial operations under Glass-Steagall also helped to prevent this undesirable risky behavior of banks.
Now let's fast forward to 2002 …
5. The Gambling of the Guardians of the Public's Money
Glass-Steagall protections from bankers gambling with the public's money are gone. The restrictions on attracting deposits by paying interest on checking accounts are gone. BUT the FEDERAL INSURANCE and ASSOCIATED MORAL HAZARD are STILL WITH US.
It is very interesting to study the memory loss that became evident during the final 1999 repeal of the 1933 Glass-Steagall Act that had built a wall between banking and speculation to protect depositors. It must be noted that Glass-Steagall had already been worn down to a low level of effectiveness. In years before 1999 financial and legal craftiness had exploited every loophole possible to circumvent Glass-Steagall. Regular deposit banking and lending, brokerage, investment banking, and insurance were already overlapping by 1999 but this was still within certain bounds imposed by Glass-Steagall.
When the Gramm-Leach-Blily Act kicked out Glass-Steagall it enabled the formation of financial holding companies that could have interests across the spectrum of finance. The walls between the important public service of credit creation and safe storage of deposit moneys, and the speculative activities of brokerage and investment banking, were torn down. Not as far down as they were in the 1920s … but getting there very fast.
The death of Glass-Steagall enabled the formation of the financial holding companies Citigroup and JP Morgan Chase, among others. Citigroup formed with the 1999 merger of Citibank and Travelers, who also owned the global investment banking and brokerage giant - Saloman Smith Barney. JP Morgan Chase & Co. formed with the 2000 merger of investment banking/brokerage giant JP Morgan and regular banking giant Chase Manhattan. These are the largest banking institutions in the United States, and their deposits are backed by the US taxpayer.
In the Savings and Loans Debacle of the 1980s that followed deregulation of Savings and Loans we learned very well what happens when you combine Federal Insurance of deposits, with deregulation of the investment activity of banks. The bank is, in essence loaning out these deposits to make these investments for their own profit. In this case this often involved over-priced speculative, and even make-believe, real estate. The depositors weren't so worried about the risks - the banks offered the potential for nice returns and well, the deposits were federally insured. But when the asset side of the bank is too risky, or maybe even make-believe, there is little backing for the deposit moneys which people think are safe and sound. These moneys actually did disappear, just as in the Great Depression, due to the risky investments made by banks in what turned out to be worthless investments. But because of the Federal Insurance on the deposits in the Savings and Loans Debacle, the US taxpayer took on the responsibility of making sure the depositors got their money back.
BUT now we enter the 21st century with two financial giants - JP Morgan Chase and Citigroup - as busy as ever and the walls between safety and soundness in the monetary system, and gambling in the equity markets, fading into the distance.
This is the BIG LEAGUES now, and only time will tell what will happen.
True, financial conglomerates must hold a separated set of assets against their banking deposits - i.e. the public's money - and they have what is known as risk-based capital requirements on those assets. This basically means that they hold an extra safety net of safe money and this safety net is commensurate with the riskiness of the bank's investments.
BUT - and here is the big BUT that nobody seems to be noticing or worried about. Under the new rules being set by the G-10 group of Central Bankers at the Bank for International Settlements in Basel, Switzerland - for the first time since capital requirements came in after the S&L debacle - large banks will be able to set these capital requirements for themselves within the next few years.
Capital levels or safety nets of banks will be essentially self-regulated!
These new international bank supervision standards are called the Basel Capital Accords and I spoke extensively about them in Wizards Part 2 on Financial Risk Transfer. Since that episode came out the banks have managed to gain even more ground in their desire for self-regulation because the public has taken absolutely no interest in this issue, even though it effects the safety of all our bank deposits. And it's not as if all this is secret either - the goings on have been posted to the Bank for International Settlements web site at www.bis.org for years. I think it's just that its hard for people to understand. It must be admitted that the Basel Accord is not an easy read! I will cover these recent and important developments in Basel at the Bank for International Settlements in later editions of Wizards. While some concerned European citizens have picked up on this tremendous development in bank "un-supervision" this issue remains entirely muted in even the progressive and independent press of the country that produces the world's reserve currency - the United States. Again I suspect its because people don't understand it. It's difficult to appreciate such money issues when you've never been exposed to a financial collapse or a monetary attack as most other countries have in the past few decades.
While you ponder the implications of self-regulation of the institutions we deposit our money in at a time when they can both be banks and be gamblers, please also consider the revelations of bank activity made during the Enron Scandal.
The Wall Street Journal reported on Tuesday January 15th that the SEC is investigating the role of Citigroup and JP Morgan Chase in financing so many of Enron's risky activities and secret partnerships. They are examining to what extent these banks help set up the partnerships and the lack of disclosure the banks presented about their involvement. So far we know that JP Morgan Chase has almost $3 billion exposure to Enron and Citigroup has disclosed over $1 billion exposure but others suspect there is more. Yet not all the deals between Enron and the two banking giants, particularly derivatives positions, have been fully unraveled and quantified. Other banks that were also involved in the riskier securities or derivatives deals with Enron and their secret partnerships were Bank of America, CS First Boston, Deutsche Bank and BNP-Paribas. In particular JP Morgan Chase, Citigroup, CS First Boston and Wachovia were involved in the financing of one of the most controversial secret partnerships of all - the LJM partnerships - headed by Enron's CFO Andy Fastow and as reported on January 14th in the Wall Street Journal. GE Capital was also involved in this but they are not a federally insured bank … and they are also not very much regulated because of this.
A professor at the University of San Diego is quoted in the January 14th Wall Street Journal article as saying "You can't do sophisticated limited partnership and credit derivatives without the participation of the major banks".
A so-called sophisticated banker might say that this concern about banks self-regulating the level of their own safety net is ridiculous because banks have built sophisticated risk management models to help them manage their risks in an optimal fashion. Indeed the leader in building these sophisticated risk management models is JP Morgan Chase who built the widely used and distributed RiskMetrics system for managing financial risk. Wait! Then one opens the January 21, 2002 issue of BusinessWeek only to find an article entitled "The Perils of JP Morgan - Enron, Argentina, Bear Market - A Year after the merger with Chase the bank is racking up losses". The old JP is in trouble from extensive exposure to failed internet companies, teleco companies, Enron and various foreign gambles. OK - so how well is this popular self-regulating risk management software working? It doesn't sound good.
Great! Where does that leave the depositor who thought his/her money was safe. Where does that leave the taxpayer who would have to foot the bill if one of these banks got in trouble? Or what if the unthinkable happens - that the gambling activities of the banks cause such a huge loss in confidence that bank money disappears like it did in the 30s and there isn’t taxpayer money to bail out the banks.
The last scenario might be considered a stretch in this day and age because we are not on the gold standard like we were when the Great Depression got underway. Roosevelt abolished gold convertibility in 1933, and the gold standard was only used after that to set exchange rates with other countries until 1971, when gold disappeared altogether from being a money standard. Without anything real backing money, and with the USD as the reserve currency of the world, the argument goes that if we ever had another panic like 1929 the Fed could pump liquidity into the markets as needed. This means that the Fed can make money up (as we spoke about in Wizards Part 1) as needed to avoid massive default on bank loans and the collapse in bank investments that can make banks go under and people lose their deposits.
But there is no guarantee that this will work. If confidence in the markets and the banks is lost to a large enough extent, the whole system may very well collapse, even though, actually BECAUSE, the credits that make up money are 100% make-believe - the system only works because people have confidence in it. Expectation that the system could fail is a self-fulfilling prophecy.
OH, And there is one more thing that exists now that didn’t exist in previous near collapses of the US Banking system - such as the S&L debacle, the 1987 Market Crash, and the Long-Term-Capital-Management collapse of 1998. This new thing is the called EURO, the currency of the European Union - and it gives people somewhere else to park their money if they decide the US banks have gotten too risky. It also gives countries another reserve currency option, and some are starting to take it.
The moral of today's story then...
Think carefully before you bank on the safety and soundness of the US banking system. Oh, and maybe start planting some vegetables in your backyard.
That's all for Wizards of Money Part 10. Please note that the Wizards of Money has a web site located at www.wizardsofmoney.org
Wizards of Money Part 10: Back to the Twenties Through the Looking Glass - Steagall
1. Introduction to Wizards Episode 10
2. Regulatory Landmarks of the Great Depression
3. A Trip Back to the 1920s
4. FEAR and BANKERS
5. The Gambling of the Guardians of the Public's Money
1. Introduction
This is the Wizards of Money, your money and financial management series … but with a twist. My name is Smithy and I'm a wizard watcher in the Land of Oz.
This is the tenth edition of the Wizards of Money and it is entitled "Back to the Twenties Through the Looking Glass - Steagall".
In this the 10th edition of Wizards we are going to take a look at the parallels between current times and the late 1920s - the period just before the great stock-market crash of 1929 and the subsequent Great Depression. We will see how it is that much of the regulation implemented during the Great Depression to address the wild and unregulated behavior of big business during the twenties has now been dismantled through de-regulation. Despite industry claims that such regulation is out-dated and no longer needed for our fancy modern markets, we will see that, not surprisingly, the dismantling of this regulation has once again given rise to exactly the dangerous market behavior it was designed to stop.
Excerpt FDR Inauguration Speech 1933 - Reign in Bankers
This excerpt from FDR's 1933 speech helps remind us of a time when financial collapse caused by unchecked and unregulated behavior of Wall Street gamblers forced America's political leadership to publicly recognize the danger such activity poses to the public as a whole. But how easily we forget these things. In the wake of the undoing of what became regulated during the FDR administration the same old players are back to their same old tricks of the twenties. Hardly discussed in all the coverage of the Enron Saga of the early 21st century is the discovery of the extent of the wild and risky behavior of the biggest federally insured banks in the US - JP Morgan Chase and Citigroup. If their involvement in financing various Enron activities is an indication of their wheeling and dealing more broadly then we have a lot to be worried about at the heart of the financial system.
In this highly deregulated market it is appropriate to look at the implications for another 1929-style crash and the potential for a financial collapse. The 29 Crash followed the high stakes risk-taking of lightly regulated powerful industries. One must consider - Would a financial collapse of this scale be a good thing? - by being possibly the only way to change the global order? Or would the first such collapse in the nuclear age bring more violence and destruction than any of us ever thought possible? Of course nobody can answer these last two questions with any certainty, but it is very important to consider what might go into the makings of a global financial collapse and to plan for what is eventually going to happen anyway. It is not a question of whether or not it will happen - as all financial systems eventually collapse, but the question is - when.
To go on this journey we will hear some speeches from important figures from this time and we will also visit with some people that actually lived through the twenties and are still able to tell us about it today.
2. Regulatory Landmarks of the Great Depression
The Great Depression brought with it numerous regulatory landmarks that stayed with us for a long time. Let's just talk about a sample of four of the major areas and the status of them today:
Utilities Regulation: In 1935 the Public Utilities Holding Company Act or PUHCA was introduced to provide national supervision of the gas and electricity utilities in order to prevent their excesses of the 1920s. In the twenties big utilities had been buying up smaller ones, hiking up consumer prices, expanding into unrelated businesses, loading up on debt, hiding losses from investors, and milking their subsidiaries and affiliates to prop up their own earnings. Sound familiar? Many people have reminded us of this law in the aftermath of the Enron collapse and Enron's various exemptions from it amidst recent recommendations by everyone from the Senate Banking Committee to the SEC to have this law repealed.
Exchange and Accounting Regulation: The Securities and Exchange Commission (or SEC) was established in 1934 under the Securities Exchange Act. During the 1920s there was effectively no Federal oversight of the securities markets, and with the market rising in the 1920s, and banks more than willing to lend for stock speculation, this created a recipe for disaster. The SEC was created to oversee market players in the securities markets and to require truthful quarterly reporting from publicly traded companies. By 2002 the effectiveness of the SEC in enforcing "truth in reporting" is highly questionable as we have seen. This is in part due to conflicts of interest rife throughout the financial world but also due the sheer complexity of financial transactions available to all companies and the absence of regulation on the most risky of financial transactions - those called derivatives trades.
The Social Security Act: Before the Great Depression there was no federal safety net for unemployed, disabled or retired persons. As often happens today the safety net was usually picked up by various charities and religious organizations. But this safety net collapsed during the Great Depression because of the collapse in confidence in the financial system. By necessity and through public pressure that had built up over the years the Social Security Act was born in 1935 and provided for old-age and unemployment benefits. Today, of course, this depression era safeguard is under attack with financial companies pushing for its privatization.
The Heart of the Financial System: Finally the big one - the regulation of the system that stands at the heart of the entire financial infrastructure - the banking system. The big act affecting the banks and securities dealers was the Glass - Steagall Act of 1933 that brought radical changes and better supervision to the banking industry. This act separated deposit banks, where depositors expect to safely park their money, from more speculative players such as securities dealers and investment banks that could make depositors' money disappear through careless gambling - and did exactly this in the 1920s. The Federal Depository Insurance Corporation or FDIC was set up in 1933 to provide insurance on depositors' funds in the event of bank failure. This was necessary to restore confidence in the foundations of the monetary system - the banks - that had just seen run after run, failure after failure, and depositors had seen their money disappear right before their very eyes.
Interestingly, also at this time, various controls and regulations were put on the Savings and Loans institutions. This was all to be undone when Ronald Reagan began his de-regulation kick in the 1980s. As we now know the undoing of these regulatory checks and balances precipitated in the Savings and Loans debacle of the 1980s that could have brought down the world financial system, except that the US taxpayer saved the day with a high priced bailout. That is what Federal Insurance means - backed by the US taxpayer. With the repeal of Glass-Steagall protections in 1999 nobody seamed to have remembered the lessons of the 1980s, let alone the lessons of the 1920s!
These regulations of the banking system - the heart and soul of the financial system - will be the focus of our show today. We will see how the gradual dismantling of them over the past 20 years, since Ronald Reagan took office in 1980 and culminating in the complete repeal of the once mighty Glass - Steagall Act in 1999, is sending the banks straight back to be bigger reflections of their 1929 former selves. Whatever are the implications of this? As already noted a glimpse at what the future might hold already leaked out amidst the Enron crisis. We are only just starting to understand the extent of the involvement of big federally insured banks in this scandal, notably JP Morgan Chase and Citigroup - both of whom were able to form banking and securities trading conglomerates after the repeal of Glass - Steagall.
3. A Trip Back to the 1920s
Much of the source material on the 1920s used for this episode of Wizards is actually from the web-site of the Library of Congress. This site has a very extensive selection of original documents scanned into electronic files and posted to the Web. For the 1920s era there is a fascinating collection called "The Coolidge Era and the Consumer Economy" and links to this are posted to Wizards of Money Web site at www.wizardsofmoney.org
Link to the Library of Congress 20s collection http://memory.loc.gov/ammem/coolhtml/coolhome.html
Now let's get in our time machine and go back to the 1920s…
Excerpt - Einstein Speech…Language, Science and Goals
This is a rare recording of Albert Einstein. I inserted these words from Einstein because, of course, Einstein was becoming a very famous person in this period known as the Roaring 20s and he was traveling in the US to explain his amazing Theories of Relativity. These theories made him the premier Time Traveler of Western History. In particular, his Special Theory of Relativity provided the Western world with a radical new look at the concept of time, and it implied strange time travel and time-space paradoxes. He notes in this speech the role that science plays in the world, and that it is leaders who set the goals and priorities first and science that follows, rather than the other way around.
Now imagine we are back in the twenties … World War I is over, the Republican Harding is President and the decade started glumly with what is known as the Agricultural Depression.
Radio was the new mass communications medium of the 1920s. The Westinghouse Company launched the first radio station KDKA in 1920 in Pittsburgh, Pennsylvania. Radio brought with it great promises as the medium for free speech and democracy … but these promises were never fulfilled in the twenties, as we shall see.
Campaign finance and corruption scandals rocked the Harding administration, the most famous being the Teapot Dome Scandal, whereby government officials had secretly leased public oil-fields to private interests in return for cash and other favors. Harding had an unfortunate incident with some foodstuffs in 1923, he dropped dead and Calvin Coolidge became president and served as such until 1928.
The Coolidge Administration favored deregulation, industry self-regulation and brought in tax cuts to stimulate spending.
ATT, NBC, and CBS built huge radio networks across the country that grew rapidly in the last half of the decade. These networks were all supported by advertising revenue and this tended to "dumb down" the content so as not to offend the major revenue sources.
The public relations industry and major corporate propaganda campaigns were launched. Spearheading much of this activity was a man named Edward L Bernays who wrote extensively on "The Business of Propaganda" and helped Coolidge get elected in 1924. Advertising in newspapers and radio claimed unprecedented proportions of print-space and airtime.
Various movements to encourage ever more spending were launched - such as the Better Homes Movement, and various targeted Women's and Negro consumer campaigns were launched. Marketing specifically to children kicked off with the first annual Macy's parade in NY in 1924. Target marketing statistical analysis reached new levels of sophistication with the introduction of the punch-card system.
America had reached new and amazing heights in consumerism!
Popular radio shows, the new talking movies and song/dance combos such as the Charleston engaged millions and helped the decade become known as the "Roaring 20s."
The Chain Store was born. Sears, Roebuck and Company opened 324 stores nationwide between 1925 and 1929. Woolworths, Krogers, JC Penney, and Walgreens all spread stores all over the country. Many loved the convenience but hated that the small local merchants were forced out of business.
The stock market climbed to new heights in the late 1920s, the ordinary American was encouraged to invest their savings in the stock market and more Americans owned stock than ever before. At the same time the proportion of Americans on incomes below the poverty line continued to increase so that this proportion reached almost 50% by 1929 by some accounts.
Campaign finance was out of control with large companies like Dupont and General Motors giving lavish contributions to both parties. In a magazine called "The Forum", in a July 1929 issue, a man called Norman Thomas wrote an article called "Plutocracy in the Saddle" about business domination of government and calling the two party system the Tweedleduplicans and the Tweedledeemocrats. He also went on to say about this system of two parties in the pockets of big business "This is immensely better than having one dictator who might get shot or one party which might provoke a rival organization based on principle. Two parties to stage a good show annually and a roaring circus every four years to divert the people - what could be better? … A devout and reasonably shrewd "captain of industry" who does not daily thank God for this great gift of two parties, both his for the campaign contributions, is an ingrate. … Indeed its more sophisticated leaders may sometimes reflect how much better it is to teach people how to read and then give them what they should read, let them vote but control the parties through which they vote, [rather] than, like the stupid Czar of Russia, to try to keep the masses illiterate and voteless."
In the latter half of the 1920s the Public Utilities were consolidating like crazy through a handful of holding companies, and in the process were raising consumer prices. As people found out later they were also taking on huge amounts of debt, overvaluing assets and hiding losses from investors.
Corporate profits were soaring throughout much of the twenties generally thought to be due to increased consumer spending, credit availability and increased efficiency.
But there was a large part of this story not being told lest it would offend the advertisers providing the revenue to the radio stations and newspapers. This was that of the conditions and wages of the non-union workers in the many factories - such as garments, candies, and so forth. In general union membership declined drastically during the 1920s.
There were sweatshop activists in those days too. You can find some of their reports online at the Library of Congress website. In one report by the Consumers League of New York entitled "Behind the Scenes in Candy Factories" you can read about the appalling conditions of women who worked in these factories and the wages of around $10-12 a week, which was considered well below a livable wage. The authors actually went to work in these factories in order to learn about these conditions. There were also reports documenting abuses in the garment industry and a campaign to encourage labeling of garments with the conditions they were made in. This was all in stark contrast to the glamorous images of these products portrayed in never ending streams of advertising.
A network of consumer activism popped up around the country much of which was spearheaded by a Nader-type by the name of Stuart Chase. In 1927 he co-authored a large study called "Your Money's Worth" documenting the shoddiness of many mass-produced products, the false claims in advertising and the trend for producers to make sure products would be replaced at frequent intervals. Comparing the consumer to Alice in a nonsensical Wonderland he found advertising industry correspondence with corporate clients that boasted that only 25% of purchases are based on real need - the rest are the product of "salesmanship".
On the financial side, Andrew Mellon was Secretary of Treasury for the whole decade. He was also one of the original founders of ALCOA - the Aluminum Company of America - exactly where our Treasury Secretary of 2002 - Paul O'Neill - is from. And O'Neill is spookily sounding a lot like his predecessor of the 20s!
A fellow named Benjamin Strong, a Morgan man, was the Director of the Federal Reserve Bank of New York at the time. His informal and totally private agreements with the head of the Bank of England, Sir Montague Norman, to help England stay on the gold standard led the Federal Reserve to make harmful interest rate cuts in 1927 that created excessive stock market speculation. This played a large part in the severity of the ultimate crash. This dealings between Strong and Norman are documented in the diaries of Federal Reserve Board member Charles Hamlin which are also readily accessible on the Library of Congress web site.
The British economist John Meynard Keynes was very critical of this move of England back to the Gold Standard saying that "In truth, the gold standard is already a barbaric relic." This is because the gold standard forced prices and wages to be set by international traders and speculators, rather than the needs of workers and consumers. Today, these are still set by international speculators in our current environment of free capital flow and domination by a single reserve currency - the USD.
This move by the Federal Reserve in 1927 to lower interest rates to help England stay on the gold standard encouraged stock speculators to borrow money at these low rates from the banks and then plow these borrowed funds into the stock-market. The banks themselves were engaged in a lot of these speculative activities because many of them also operated investment banking and brokerage businesses. This speculation continued until 1929 when in August the Federal Reserve raised interest rates.
Stock prices reached their peak in September - the Dow Jones Index having doubled in just over a year. But then with the higher interest rates on borrowed speculative funds and nervousness that stocks were overvalued, stocks started falling in October. Banks started calling in the loans used to buy stock. On October 29, 1929 (Black Tuesday) the Dow-Jones Industrial Index crashed enough to wipe out this doubling of the Dow. The Dow and the markets as a whole started on a downwards spiral that bottomed out in 1932. Many people just couldn’t pay off their loans and banks started going bankrupt all over the place from this and from the collapse of their own stock investments. There was at this time NO Federal Insurance of bank deposits and people saw not only their stock markets investments disappear, but also their bank accounts vanish. For, even under the gold standard, bank money is nothing but the confidence that it can be used in trade. When that confidence disappears, so does money, and so does everything you worked for and transferred into those mysterious make-believe credits. If you need to refresh you memory about why money is simply an abstract notion and how it comes into existence - you can revisit Wizards of Money Part 1 entitled "How Money is Created".
America was still on the gold standard. So compounding all these problems the massive loss of confidence in the banking system caused the worst thing of all for the financial system - a run on banks - with people wanting to redeem their bank deposits and Federal Reserve Notes for gold. But of course there isn't enough gold under fractional reserve banking and such a run on banks will always collapse it. Expectation of bank collapse is a self-fulfilling prophecy, as it is with the stock markets, and as it is with any currency.
When you have such lost confidence in the financial system, where there has just been complete dependence on it, the whole monetary system collapses - money disappears because all it was was confidence anyway. Everything - markets, trade, business, work - it all starts to grind to a halt.
The financial house of cards collapses. And should we be afraid of what is - well, just a pack of cards?
Excerpt - Alice and The Pack of Cards
4. FEAR and BANKERS
Herbert Hoover was President at the time of the 1929 Crash. In the subsequent depression neither his administration nor the Federal Reserve did very much to bring the country out of the depression. This helped to get FDR elected and he took office in 1933.
As history goes whenever a famous leader says something really important about big business it doesn't get remembered very well. Instead the large corporations who run the networks seem to have an uncanny knack of extracting only the short phrases that don't hurt revenues and playing them over and over again so that nobody will remember the important things that were said about their advertisers.
And so it was with the FDR inauguration speech of 1933 where every man and his dog remembers:
"The only thing we have to fear is fear itself".
But how many people remember the other parts of the speech where FDR is talking about the bankers and the Wall Street speculators? Such harsh criticism of the Wizards has never been heard since from an American President!
I will play excerpts from this speech about the Wizards, but since the sound recording quality is so poor I will then repeat these sections.
Excerpt from FDR 1933 Speech:
" And yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply.
Primarily this is because the rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.
True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They only know the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.
Yes, the money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.
Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and the moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days, my friends, will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men.
Recognition of the falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing. Small wonder that confidence languishes, for it thrives only on honesty, on honor, on the sacredness of obligations, on faithful protection, and on unselfish performance; without them it cannot live."
"And finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency."
And so the process for implementing regulation to provide checks and balances and bounds on the markets began. For it is only after such a collapse that the Wizards actually realize that their success in their own game does ultimately depend on the people's willingness to play in it. The regulatory blitz included all the landmark laws described above plus many more. The regulations, of course, started first and foremost with the Rulers of the Exchange of Mankind's goods and the Money Changers in their Temple.
The 1933 Glass-Steagall Act built a wall between banks - which are essentially the guardians of the publics money and the brokers and investment banks - who are the primary gamblers in the exchanges. This would prevent privileged bankers from gambling with other people's money to make profits for themselves. Glass-Steagall also separated these institutions from insurance companies who took on a completely different set of risks.
To restore confidence in the banks and therefore rebuild the monetary system 1933 also saw the birth of federal deposit insurance under the FDIC or the Federal Depository Insurance Corporation. This insurance would guarantee that depositors would get all or most of their money back in the case of bank insolvency. It was realized that this insurance created a moral hazard for banks. Because deposits were backed by the Federal Government banks had more of an incentive to take more risks. They could get more deposits by promising a higher return to depositors. With this money they could invest in riskier higher return assets to get higher profits and the depositors wouldn't be too worried about this because they knew there was federal insurance on their deposits. This realization brought in a law that forbade paying interest on checking accounts so that banks couldn’t do this. The separation of banks and other financial operations under Glass-Steagall also helped to prevent this undesirable risky behavior of banks.
Now let's fast forward to 2002 …
5. The Gambling of the Guardians of the Public's Money
Glass-Steagall protections from bankers gambling with the public's money are gone. The restrictions on attracting deposits by paying interest on checking accounts are gone. BUT the FEDERAL INSURANCE and ASSOCIATED MORAL HAZARD are STILL WITH US.
It is very interesting to study the memory loss that became evident during the final 1999 repeal of the 1933 Glass-Steagall Act that had built a wall between banking and speculation to protect depositors. It must be noted that Glass-Steagall had already been worn down to a low level of effectiveness. In years before 1999 financial and legal craftiness had exploited every loophole possible to circumvent Glass-Steagall. Regular deposit banking and lending, brokerage, investment banking, and insurance were already overlapping by 1999 but this was still within certain bounds imposed by Glass-Steagall.
When the Gramm-Leach-Blily Act kicked out Glass-Steagall it enabled the formation of financial holding companies that could have interests across the spectrum of finance. The walls between the important public service of credit creation and safe storage of deposit moneys, and the speculative activities of brokerage and investment banking, were torn down. Not as far down as they were in the 1920s … but getting there very fast.
The death of Glass-Steagall enabled the formation of the financial holding companies Citigroup and JP Morgan Chase, among others. Citigroup formed with the 1999 merger of Citibank and Travelers, who also owned the global investment banking and brokerage giant - Saloman Smith Barney. JP Morgan Chase & Co. formed with the 2000 merger of investment banking/brokerage giant JP Morgan and regular banking giant Chase Manhattan. These are the largest banking institutions in the United States, and their deposits are backed by the US taxpayer.
In the Savings and Loans Debacle of the 1980s that followed deregulation of Savings and Loans we learned very well what happens when you combine Federal Insurance of deposits, with deregulation of the investment activity of banks. The bank is, in essence loaning out these deposits to make these investments for their own profit. In this case this often involved over-priced speculative, and even make-believe, real estate. The depositors weren't so worried about the risks - the banks offered the potential for nice returns and well, the deposits were federally insured. But when the asset side of the bank is too risky, or maybe even make-believe, there is little backing for the deposit moneys which people think are safe and sound. These moneys actually did disappear, just as in the Great Depression, due to the risky investments made by banks in what turned out to be worthless investments. But because of the Federal Insurance on the deposits in the Savings and Loans Debacle, the US taxpayer took on the responsibility of making sure the depositors got their money back.
BUT now we enter the 21st century with two financial giants - JP Morgan Chase and Citigroup - as busy as ever and the walls between safety and soundness in the monetary system, and gambling in the equity markets, fading into the distance.
This is the BIG LEAGUES now, and only time will tell what will happen.
True, financial conglomerates must hold a separated set of assets against their banking deposits - i.e. the public's money - and they have what is known as risk-based capital requirements on those assets. This basically means that they hold an extra safety net of safe money and this safety net is commensurate with the riskiness of the bank's investments.
BUT - and here is the big BUT that nobody seems to be noticing or worried about. Under the new rules being set by the G-10 group of Central Bankers at the Bank for International Settlements in Basel, Switzerland - for the first time since capital requirements came in after the S&L debacle - large banks will be able to set these capital requirements for themselves within the next few years.
Capital levels or safety nets of banks will be essentially self-regulated!
These new international bank supervision standards are called the Basel Capital Accords and I spoke extensively about them in Wizards Part 2 on Financial Risk Transfer. Since that episode came out the banks have managed to gain even more ground in their desire for self-regulation because the public has taken absolutely no interest in this issue, even though it effects the safety of all our bank deposits. And it's not as if all this is secret either - the goings on have been posted to the Bank for International Settlements web site at www.bis.org for years. I think it's just that its hard for people to understand. It must be admitted that the Basel Accord is not an easy read! I will cover these recent and important developments in Basel at the Bank for International Settlements in later editions of Wizards. While some concerned European citizens have picked up on this tremendous development in bank "un-supervision" this issue remains entirely muted in even the progressive and independent press of the country that produces the world's reserve currency - the United States. Again I suspect its because people don't understand it. It's difficult to appreciate such money issues when you've never been exposed to a financial collapse or a monetary attack as most other countries have in the past few decades.
While you ponder the implications of self-regulation of the institutions we deposit our money in at a time when they can both be banks and be gamblers, please also consider the revelations of bank activity made during the Enron Scandal.
The Wall Street Journal reported on Tuesday January 15th that the SEC is investigating the role of Citigroup and JP Morgan Chase in financing so many of Enron's risky activities and secret partnerships. They are examining to what extent these banks help set up the partnerships and the lack of disclosure the banks presented about their involvement. So far we know that JP Morgan Chase has almost $3 billion exposure to Enron and Citigroup has disclosed over $1 billion exposure but others suspect there is more. Yet not all the deals between Enron and the two banking giants, particularly derivatives positions, have been fully unraveled and quantified. Other banks that were also involved in the riskier securities or derivatives deals with Enron and their secret partnerships were Bank of America, CS First Boston, Deutsche Bank and BNP-Paribas. In particular JP Morgan Chase, Citigroup, CS First Boston and Wachovia were involved in the financing of one of the most controversial secret partnerships of all - the LJM partnerships - headed by Enron's CFO Andy Fastow and as reported on January 14th in the Wall Street Journal. GE Capital was also involved in this but they are not a federally insured bank … and they are also not very much regulated because of this.
A professor at the University of San Diego is quoted in the January 14th Wall Street Journal article as saying "You can't do sophisticated limited partnership and credit derivatives without the participation of the major banks".
A so-called sophisticated banker might say that this concern about banks self-regulating the level of their own safety net is ridiculous because banks have built sophisticated risk management models to help them manage their risks in an optimal fashion. Indeed the leader in building these sophisticated risk management models is JP Morgan Chase who built the widely used and distributed RiskMetrics system for managing financial risk. Wait! Then one opens the January 21, 2002 issue of BusinessWeek only to find an article entitled "The Perils of JP Morgan - Enron, Argentina, Bear Market - A Year after the merger with Chase the bank is racking up losses". The old JP is in trouble from extensive exposure to failed internet companies, teleco companies, Enron and various foreign gambles. OK - so how well is this popular self-regulating risk management software working? It doesn't sound good.
Great! Where does that leave the depositor who thought his/her money was safe. Where does that leave the taxpayer who would have to foot the bill if one of these banks got in trouble? Or what if the unthinkable happens - that the gambling activities of the banks cause such a huge loss in confidence that bank money disappears like it did in the 30s and there isn’t taxpayer money to bail out the banks.
The last scenario might be considered a stretch in this day and age because we are not on the gold standard like we were when the Great Depression got underway. Roosevelt abolished gold convertibility in 1933, and the gold standard was only used after that to set exchange rates with other countries until 1971, when gold disappeared altogether from being a money standard. Without anything real backing money, and with the USD as the reserve currency of the world, the argument goes that if we ever had another panic like 1929 the Fed could pump liquidity into the markets as needed. This means that the Fed can make money up (as we spoke about in Wizards Part 1) as needed to avoid massive default on bank loans and the collapse in bank investments that can make banks go under and people lose their deposits.
But there is no guarantee that this will work. If confidence in the markets and the banks is lost to a large enough extent, the whole system may very well collapse, even though, actually BECAUSE, the credits that make up money are 100% make-believe - the system only works because people have confidence in it. Expectation that the system could fail is a self-fulfilling prophecy.
OH, And there is one more thing that exists now that didn’t exist in previous near collapses of the US Banking system - such as the S&L debacle, the 1987 Market Crash, and the Long-Term-Capital-Management collapse of 1998. This new thing is the called EURO, the currency of the European Union - and it gives people somewhere else to park their money if they decide the US banks have gotten too risky. It also gives countries another reserve currency option, and some are starting to take it.
The moral of today's story then...
Think carefully before you bank on the safety and soundness of the US banking system. Oh, and maybe start planting some vegetables in your backyard.
That's all for Wizards of Money Part 10. Please note that the Wizards of Money has a web site located at www.wizardsofmoney.org
Slaughterhouse: Will the Stock Market Crash?
-http://www.buzzflash.com/contributors/2002/07/19_Slaughterhouse.html
by David Podvin
A BuzzFlash Special Commentary
The recent weakness in the stock market has wrought havoc on investors. Mounting losses have been accompanied by increasing concern on the part of Americans who are watching their dreams of financial security waste away. Yet, as prices decline, Wall Street and the corporate media are trying to persuade investors to buy and hold even more shares of stock.
The public has been advised that this is just one more temporarily painful correction in a long term bull market. It isn't. It is a grueling prelude to annihilation. Four hundred years of market history indicate that investors who heed the advice of Wall Street to buy and hold for the long term are allowing themselves to be led to a stock market slaughterhouse.
On February 3, 2002, in an article titled, “Missing The Overall”, I alerted readers to the fact that the mainstream media was misrepresenting the Enron scandal as an aberration of corporate corruption. As I reported at the time, the Enron debacle was just a symptom of a corporate epidemic:
"Many corporate empires have been built on such accounting legerdemain, including General Electric (NBC), Viacom (CBS), Disney (ABC), AOL/Time Warner (CNN, Time Magazine), News Corporation (Fox), The Washington Post Company (Washington Post, Newsweek), the Tribune Corporation (Chicago Tribune, Los Angeles Times), and the New York Times Company (New York Times, Boston Globe).
Enron is the tip of an iceberg on which sits the entire mainstream media.
A national association of accounting firms has called on the Securities and Exchange Commission to require all publicly held corporations to report real GAAP earnings. The return to ethical accounting standards would mean that, in order to reflect the current valuation of the Dow Industrials, the average would fall to 5825. In order to reach the historical norm based on GAAP, the Dow would decline to 3300."
Since then, accounting scandals have rocked WorldCom, Tyco, Qwest, Xerox, Adelphia, and many others. More corporate dominoes are now on the verge of toppling.
In February, the factual news – as opposed to the fiction that was reported on television and in the Wall Street Journal – was very bad. The accounting scam was beginning to unravel, and the insanely overvalued market was vulnerable to a major decline. As trillions of dollars were about to evaporate, Corporate America was reassuring investors that the future was bright.
On July 17th, stocks temporarily rallied. After the close, brokerage analysts continued to tell the public that the market is ready to move much higher. I maintain that, as the economy has slowed, corporations have further exaggerated their earnings in order to support their stock prices. As a result, the gap between real corporate earnings and the phony kind is larger than ever. Despite the carnage that has already occurred, the long term future for investors is actually bleaker than it was in February.
My perception stands in stark contrast to the propaganda that is being generated by Wall Street and the corporate media. They continue to spoon-feed happy talk to investors who are desperate to hear that things will improve. The professionals on the New York Stock Exchange are still aggressively selling short while their employees exhort the public to aggressively buy. Each rally is accompanied by brokerage firm proclamations of a new bull market. The public is again being seduced with the promise of the nonexistent economic recovery that is always just around the corner. Investors are being told the pessimism is now so great that everyone who wanted to sell must have already sold - meaning that the next major move will be to the upside.
It is the same pitch that Wall Street and the corporate media broadcast in 2000 and 2001. Their rhetoric was deceitful then, and it still is. This is an ongoing swindle of the American people. Hard-earned retirement accounts and pension funds are being obliterated. The faith of average citizens in Big Business is being rewarded with poverty.
And it is going to get much, much worse.
The speculative mania began in 1994, shortly after Congress overrode President Clinton’s veto of legislation that protected corporate executives from being sued by shareholders for lying about earnings. Freed from civil liability, and faced with the prospect of making incredible fortunes on their stock options, the leaders of America’s public corporations invented fairy tales in order to con the public into buying equities. The result was “irrational exuberance” that ended in the first quarter of 2000 with stocks more overvalued than at any time in history.
Every speculative mania of the last four hundred years has made the round trip to its point of origin. Whether it was the Tulip mania, or the South Sea bubble, or the stock market of the Roaring Twenties, every mania has ended with a panic that dropped prices below where they were before the speculation started. In the case of the Crash of 1929, it took investors twenty-five years to get even. Unless this time is unique, the market will return to the scene of the crime. It will drop to – at least – the level where it was trading before the congressionally endorsed corporate lying for dollars began in 1994. That means the major averages will fall – at least – another fifty percent from here.
It will not be a straight-line drop. There were big bear market rallies beginning in April and September of 2001. In the current emotional environment, there can be a violent countertrend up move at any time. When rallies do occur, they will doubtlessly be accompanied by orgasmic screams of ecstasy from Wall Street. The shills for the financial establishment will once again lure naïve investors into the market so the big boys can sell equities short at higher, more profitable levels.
The reasons that are being given for buying stocks as long term investments are false. The extremely high prices that Corporate America has paid for buyouts and takeovers have created massive debt that will take years to reduce. An enduring economic recovery will not occur until the elimination of the tremendous corporate inventory overcapacity that was built up during the acquisition frenzy.
While the market may look undervalued by comparison to where it was a couple of years ago, the bargains are illusory. Stocks are still extremely overvalued on an historical basis. On July 10, Merrill Lynch recommended that investors buy Cisco Systems for the long term at $13.51. This is the same Merrill Lynch that in 2000 told the public Cisco was a winning investment for the long term at $82. Yet even now, gullible investors have again charged in to buy Cisco shares based on Merrill’s recommendation.
The stock of Cisco Systems currently is selling at more than five times above the historical norm for companies with a similar growth rate. The firm’s reported earnings do not include the cost of employee stock options. If Cisco had acknowledged the expense of the options, its reported earnings would have dropped by two thirds. The saving grace here is that Merrill Lynch does not recommend stocks that are below three dollars a share, so its days of conning the public into investing for the long term in Cisco Systems are numbered.
The myth that investors are overly pessimistic was debunked by Comstock Partners on July 12:
At the 1974 bottom cash at equity mutual funds was 11.7% of assets, the percentage of bearish investment advisors was 67%, only 4% of stocks were above their own 200-day average and stocks on average sold at 8 times earnings. We are nowhere near these numbers today. Currently, cash is 5.3% of equity mutual funds assets, the percentage of bearish advisors is 37%, stocks above their 200-day average are at 37% and the S&P 500 is at 40 times trailing reported earnings and 25 times consensus 2002 estimated earnings.
Translated into English, Comstock's analysis demonstrates that market sentiment is nowhere near the emotionally depressed level that accompanies the end of a major decline.
A recent New York Times poll revealed that the average expectation by investors is for double-digit returns on stock investments over the next five years. That is not pessimistic. It is optimistic.
Last week, AOL conducted a poll posing the following question: “What are you doing with your stocks?” Over sixty percent of the respondents chose, “I'm leaving them alone. The market will come back.” That is not pessimistic. It is masochistic.
The Dow Industrials have begun to fall hard because foreign investors – who generally prefer to buy the stocks of household names – have begun taking their money out of America. According to a report by the Federal Reserve, foreigners are now withdrawing their funds from this country at a greatly accelerating pace. The reason is simple – they do not share the parochial view that George W. Bush is doing a great job. Foreign money managers invested large amounts in America during the mid to late 1990s, when they had confidence in the intelligence and skill of a capable president. After almost two years of watching Bush in action, they are now voting with their cash. These are votes that Antonin Scalia is helpless to void. As a result, the blue chips and the American dollar are getting pummeled.
There is reason to believe that a fresh spate of corporate accounting scandals will soon arrive. The new “exaggerations” will be even larger than most of those that occurred during better economic times. Faced with the unpleasant task of reporting smaller profits, many corporations have compensated by telling bigger lies. Standard and Poors estimates that Raytheon may be reporting profits that are nearly 9,000 percent better than its "core" real numbers; Perkin-Elmer is overstating earnings by 7,274 percent; The Gap by 1,047 percent; Apple Computer by 1,003 percent; and Yahoo! by 956 percent.
According to the Associated Press, several Apple executives sold company stock worth almost $50 million in the weeks before an earnings warning caused Apple’s shares to plunge. Chief Financial Officer Fred Anderson was one of those who sold his stock just before the bad news was released to the public. He claims that there is “nothing wrong” with what he did.
This attitude toward cheating the shareholders has been noticed overseas. Guido Rossi, a former chairman of Telecom Italia, said, "What is lacking in the U.S. is a culture of shame. No business leader in the U.S. is considered a thief if he does something wrong. It is a kind of moral cancer."
Thus far, the favorite companies of American investors have been largely spared. They will not be able to hide their lies much longer. IBM is going to get nailed for accounting fraud, as will Intel and Cisco and General Electric. The GE Capital division, which is the big deal-making profit generator for the conglomerate, is a cesspool of accounting corruption. General Electric, which owns NBC and is the most widely respected company in America, is going to take a hard fall.
So will the media conglomerates. They are still lying about their earnings, too.
When the bluest of the blue chips – along with the ostensible guardians of the truth - are caught cheating their shareholders, the current crisis of confidence will turn into panic. Investors will not trust business to be honest with them, nor will they trust the media to honestly report what is going on. The result will be a terrifying freefall in stock prices.
The Federal Reserve will do everything it can to stem the tide, and huge short-term rallies will result. Massive Fed intervention worked to end the crash in October 1987, but that frightening drop had occurred within the context of the greatest bull market ever. The Fed tried the same thing in September 2001, with only temporary success. The S&P 500 and the NASDAQ are now under the September low, because the most recent intervention occurred within the context of what will be the greatest bear market ever. The constant lowering of interest rates by Alan Greenspan has not worked to stop the continuing deflation of the biggest speculative bubble in human history. His intervention to stop a crash won’t work this time, either. Not for long.
What is going to happen to the market will devastate most people. During the crash in 1929, one out of eighty Americans owned stocks. Today, more than half do. The lives of trusting individuals who bought the dream are going to be permanently damaged. The irreplaceable money in the pension funds and 401(k) plans of millions of Americans will vanish. This will mean a long term decline in the standard of living for the majority of people in this country.
The aftermath of the stock market mania is going to be heartbreaking. Innocent people will be crushed.
Meanwhile, the guilty corporate aristocracy is crying all the way to the Swiss bank. Relatively few of them will ever be made to suffer for their banditry. The vast majority of corporate brigands will ride off into the sunset with their ill-gotten loot. Like Al Dunlap of Sunbeam and Gary Winnick of Global Crossing, their penalty for lying and cheating and stealing from their shareholders will be a life sentence of living in luxury.
What has been done cannot be dismissed as white collar crime. Given the countless lives of employees and investors that have been ruined by the corporate miscreants, they are guilty of crimes against humanity. Yet their atrocities are excused by the mindless chorus of conservative lemmings who continue to insist that there is absolutely nothing wrong with American Big Business - except for the slanders manufactured against it by wild-eyed communist critics.
Human nature never changes. There was mass euphoria at the top in 2000, with the boom in technology ensuring permanent prosperity and budget surpluses for as far as the eye could see. At the bottom, there will be overwhelming despair that this country has not experienced since the last stock mania bear market ended in 1932. There is nothing we can now do to prevent it from happening; this is the inevitable day of reckoning that follows the unraveling of the most audacious Ponzi scheme ever perpetrated.
Unfortunately, the impending disaster will be even worse than it has to be. The remedies that have been proposed by George W. Bush are transparently farcical, which guarantees a further worsening of what is already a horrible situation. Bush appears to be totally out of his depth - another Herbert Hoover - and the very real possibility exists that he could produce similar results.
As was the case in the spring, Corporate America and its mainstream media are saying that there is no reason to worry. The party line is still that investors should be buying and holding stocks for the long term. According to the current Wall Street marketing campaign, a falling market is actually a good thing, because lower stock prices create bargains. But there are no bargains during the collapse of a speculative mania. It is vital to remember that, during a financial panic, just preserving what you already have is a wonderful investment.
Thus far, believing the Wall Street hucksters has been a painful mistake. If history proves to be an accurate guide, then continuing to follow the self-serving advice of the financial establishment is going to result in a nightmarish catastrophe for the average American.