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The following article appeared in Left Business Observer #102, September 2002. It retains its copyright and may not be reprinted or redistributed in any form - print, electronic, facsimile, anything - without the permission of LBO.

Bubble accounting

Fortunately for the administration, Iraq is driving bear market news off the front pages (even LBO's). But fallout from the bubble's bursting continues to float earthwards, and the question of who will pay, politically or financially, has barely been asked.

An editorial in the August 19 issue of The Nation asked some questions, and answered a few too. It blamed the bubble on "conservatives" and proposed a new New Deal as a solution. It's more complicated than that.

In the (anonymous) editorial, "conservative" is used interchangeably with Republican, especially the hard ideological right kind. But that isn't fair: Bill Clinton and Robert Rubin deserve lots of blame too. But Clinton's name appears only for his marginal repair of Reagan-era gutting of antitrust enforcement (as if the promotion of competition weren't hard on workers). The name of Robert Rubin, who served as Treasury Secretary between jobs at Goldman Sachs and Citigroup, and who pressed the liberalization of capital flows on a reluctant outside world, doesn't appear at all. The Mexican, Asian, and Russian crises - global bubbles that hurt millions when they burst - were all Clinton era disasters, to which administration policy (like the capital account liberalization that Stiglitz talks about on p. 4 of this issue) contributed generously.

Sir Bubble

Which isn't to deny that the bubble's most important promoter, more important even than Jack Grubman, was a real movement conservative - Alan Greenspan, Ayn Rand's most famous disciple.

It's gratifying to see Greenspan's stock sinking. Several analysts have written up his embarrassing speech at the Federal Reserve Bank of Kansas City's annual elite retreat at Jackson Hole. But since this publication has been making fun of Greenspan for 15 years, long before it was fashionable, some piling on is in order.

Greenspan argued that no one could really have known a bubble was underway - and even if he could, there was nothing he could have done about it anyway. Keeping to his line during the mania, he maintained that a bubble can only be recognized after its bursting, which might be a nice Hegelian point, but isn't a helpful guide to policy. Lots of observers less esteemed than Greenspan noticed one at the time, and presumably it's his job to stay on top of these things.

He could have raised interest rates earlier, which would have burst the bubble, though it might have thrown the economy into recession as well; he can't be faulted for worrying about that. But he could have raised margin requirements on stocks - forcing investors who buy shares with borrowed money to put up more cash. This would reduce demand for stocks, but also send a hostile signal to the markets. At Jackson Hole, he argued that raising margin requirements would have had no effect on stock prices.

That's not what he said at a policy meeting in September 1996. After listening to then Fed governor, now top Bush economic advisor, Lawrence Lindsey offer a comprehensive case that a bubble was well underway, Greenspan commented: "I recognize that there is a stock market bubble problem at this point and I agree with Governor Lindsey that this is a problem we should keep an eye on....We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it. My concern is that I am not sure what else it will do." Presumably his worry was about effects on the real economy, a reasonable concern, but he knew there was a bubble and that he could have pricked it. He did speak the phrase "irrational exuberance" a few months later, but when that was greeted with bad reviews, he turned into the New Economy's leading promoter and the guarantor of stock prices.


Back to the Nation editorial, which laments a "profound inversionin the governing values of US economic lifethe triumph of finance over the real economy. In the natural order of capitalism, the financial system is supposed to serve the economy of production - goods and services, jobs and incomes - but the narrow values of Wall Street have become the master." It's usually dangerous to apply the word "natural" to a social system; it's been used to justify everything from fascism to anarchism. And historically and theoretically the claim is a bit odd. Capitalism has always been about maximizing profits. Financiers exerted tremendous control over the real economy in the late 19th and early 20th centuries. Financial assets are the ways by which an owning class constitutes itself in a world of large public corporations; this wasn't a revolution in values but an assertion of the rights of ownership. Throughout the 1980s and 1990s, shareowners demanded higher profits, which they mostly got from the early 1980s until the mid-1990s - the fundamental reason the bubble started expanding in the first place. The first part of the bull market was thoroughly rational exuberance among a class that was winning fight after fight.

After years of reaction, a new New Deal would be nice, but it pays to think about how we got the first one. To use the old language, the U.S. ruling class was terrified by the prospects of bankruptcy and appropriation. The USSR looked plausibly successful while the capitalist world was in depression, and domestic Communists and other radicals were pervasive and influential. Huey Long was eating into Roosevelt's base. Workers were taking over factories and mines. Faced with such threats, the ruling class cut some deals. As soon as the war was over, they began campaigning passionately to undo the social compromise. At home, unions were purged and Reds were persecuted, and we entered a state of permanent war against the USSR. It would take a popular mobilization that's just not imaginable at present (and probably the defection of a large portion of the "developing" world from IMF orthodoxy as well) to make a new New Deal a possibility.

There are encouraging signs of a Southern defection, with mass organizing (into little Paris communes or spontaneous soviets) sweeping Argentina, Lula on the verge of winning in Brazil, strong anti-privatization movements across Latin America and Africa.

Not in the U.S. though. Maybe another 1,000 off the Nasdaq will change that.


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