Posted on 07/24/2002 7:44:25 AM PDT by RCW2001
GERALD F. SEIB, and
Wednesday, July 24, 2002
©2002 Associated Press
URL: http://www.sfgate.com/cgi-bin/article.cgi?f=/news/archive/2002/07/24/financial1034EDT0072.DTL
(07-24) 07:34 PDT (AP) --
WASHINGTON -- High-profile companies go bust. Business leaders fall into disrepute. The stock market crumbles. Finally, the political system convulses, rewriting the rules the corporate world must follow.
All that happened to the U.S. in the early 1930s, when a shattered economy, a devastated stock market and revulsion toward the business class produced sweeping changes in the way business and finance were conducted.
Now America faces the possibility of a similar wave of reform, if the economy sours and the political winds shift. Today's economic woes hardly rival those of the 1930s, and Congress's rush to clamp down on corporate misconduct is mild compared with the legislative earthquake that shook the business world then. But the country is beginning to reappraise the celebration of free-market forces that marked the 1990s. And early political tremors of public opinion hint at greater fallout to come.
A new Wall Street Journal/NBC News poll shows that, for the first time since George W. Bush took office, a plurality of Americans -- 42 percent -- believe the country is headed in the wrong direction. Fully 70 percent don't trust the word of brokers and corporations. One-third say they have "hardly any confidence" in big-company executives -- the highest proportion in more than three decades. Confidence in Congress is plummeting, too. Just 34 percent approve of lawmakers' performance, down from 54 percent in January.
Political momentum to restrain government regulation is waning. As they await the government's response to a wave of business scandals, six in 10 Americans say they are worried regulators won't go far enough.
AFL-CIO President John Sweeney calls this the best chance in years "to fundamentally change the way corporate America works." And free-market apostles, ascendant since Ronald Reagan's presidency, fear that even a Republican White House may join a populist stampede. If that happens, "they're going to have a depression on their hands," warns author George Gilder, whose 1981 book, "Wealth and Poverty," is still popular with many conservatives. "If Bush becomes part of the echo chamber, he's going to destroy his party."
The 2002 market meltdown could turn into a historic turning point in American politics and regulation if two significant changes occur.
First, the current crisis of confidence in business and markets would have to turn into a broader economic decline. When Franklin Roosevelt embarked on the New Deal, one in four Americans was out of work, four times today's unemployment rate. The spread of stock ownership means Main Street is feeling Wall Street's pain, but so far, that pain has produced public anger -- not desperation.
Second, the economic shock would have to realign the nation's even balance of political power to give politicians the clear mandate for change that President Roosevelt and his Democratic Party felt. That hasn't happened yet, the new poll shows. Mr. Bush continues to enjoy a robust 67 percent approval rating, and his party is still holding its own in the battle for control of Congress in the November elections. Some 36 percent of Americans say they plan to vote Democrat for the House, while 34 percent plan to vote Republican. That is only a slight change since January, favoring the Democrats.
But sweeping political change doesn't come overnight, as the 1920s and 1930s show. The country knew it was in deep trouble after the stock market crashed in 1929. The Democratic Party gained 53 seats in the House elections in 1930, but Republicans narrowly retained control of the chamber. The GOP also maintained a one-seat edge in the Senate, while Republican President Herbert Hoover looked ahead to the last two years of his White House term.
The political tidal wave didn't hit until 1932, three years after the start of the economic shock. Republicans lost 101 more seats in the House, which as a result, tilted toward the Democrats by a 313-117 margin. The GOP also lost 12 more Senate seats and became a distinct minority there, too. FDR completed the Democratic sweep with his 1932 landslide.
That new political alignment produced, in rapid order, the Securities and Exchange Commission, the Glass-Steagall Act separating the banking and investment businesses, the Utility Holding Company Act restricting the centralization of utility control, and reform of the Federal Reserve. It was the most sweeping change ever in the way America does business, and it created the regulatory framework that still governs business today.
It's that framework that lawmakers are now adjusting in the accounting-reform bill before Congress. "Our crisis isn't of the same dimension" as in the 1930s, says Sen. Jon Corzine, a former co-chairman of Goldman Sachs. But the accounting-reform bill likely to pass Congress next month is "probably as important a piece of legislation for America and the regulatory structure as any since then," adds the New Jersey Democrat. It plugs what he considers the most significant hole left in the 1930s legislation by establishing clear standards and oversight for the accounting industry.
Along with tougher enforcement of existing laws, that step may satisfy for now the public's desire for action. By a 63 percent-33 percent margin, Americans say the president and Congress should focus on prosecuting corporate wrongdoers rather than passing new laws.
But lawmakers may not stop there. Next on the agenda for debate: overhauling pension laws to improve protections for workers. Falling down the priority list, meanwhile, are earlier White House priorities such as partial privatization of Social Security, for which support has fallen along with the sliding Dow Jones Industrial Average.
"We're entering the sort of adjustment in the business-political relationship that comes with a major market downturn," says Kevin Phillips, a scholar of that relationship and author of a new book on the history of American wealth. Whether that adjustment turns into wholesale re-engineering remains an open question.
The first test comes in November, when control of Congress will be decided. Democrats hope to hold their 50-49 edge in the Senate and take control of the House from Republicans by gaining six seats there. If the Democrats succeed, they will be in position to challenge Mr. Bush for control of the economic agenda and set the terms of debate for the 2004 presidential contest.
A Democratic takeover would produce a dramatically different approach, in tone and substance, to the relationship between government and business. The new chairman of the House Energy and Commerce Committee would likely be Rep. John Dingell of Michigan, who supports a national health-insurance program. He is currently campaigning as a staunch foe of corporate misbehavior. The new chairman of the House Financial Services Committee would be Rep. Barney Frank of Massachusetts, who backs reregulation of the cable-television industry. The new chairman of the House Ways and Means Committee would be Rep. Charles Rangel of New York, who has proposed amending the U.S. Constitution to guarantee every American "a right to a home."
For the first time since the early days of Bill Clinton's presidency, activists on the political left say they are on the verge of converting public discontent into vigorous support for activist government. "The disgrace of corporate capitalism is an opportunity to dethrone the role of the market generally," Robert Kuttner writes in the current issue of the liberal American Prospect magazine.
Conservatives who rose to political and intellectual dominance when Mr. Reagan replaced Jimmy Carter say that is precisely the wrong prescription. What the U.S. economy needs, insists Mr. Gilder, is less regulation rather than more, especially in the troubled telecommunications sector. But eroding confidence in American business has, at least temporarily, made that a losing argument.
As a result, says independent Rep. Bernie Sanders of Vermont, the only Democratic Socialist in Congress, the political equation on issues such as trade expansion, the environment and health care has been altered. "People's faith in the ruling class in this country has been shattered," he declares.
Or at least shaken. The Journal/NBC poll shows that 71 percent of Americans believe that profit-hungry businesses cut corners on service and overcharge customers. Amid the economic boom two years ago, a plurality said businesses treat consumers fairly. Six in 10 call corporate wrongdoing "a widespread problem" in "a system that is failing." By a 49 percent-40 percent margin, Americans say the stock market is "no longer a fair and open way to invest one's money."
That unease runs deep enough to extend to Republican lawmakers who themselves have come from the business world. "There's no question that a (business) culture developed, probably over a 20-year period, that was very unhealthy," says GOP Sen. Chuck Hagel of Nebraska, a former telecommunications entrepreneur. "That culture was, `If it's not illegal, it's probably OK.' "
Even so, Mr. Hagel, a potential GOP presidential candidate in 2008, thinks the combination of congressional reform of corporate governance and self-regulation by financial markets can restore public confidence before the fallout becomes too great. "The American people will be conditioned for a generation from what we've learned," he predicts -- but not inclined to turn the economy or politics upside down.
Some believe the proliferation of stock ownership that has spread the pain of the current downturn could also act as a buffer against overreaction to revelations of business misconduct. "In earlier periods of American history, it would have been a much bigger deal," notes Walter Dean Burnham, a scholar of political realignments at the University of Texas. Without far more provocation, the U.S. middle class today is literally too invested in the economic system to support its upheaval.
Mr. Phillips notes an additional "X factor" that didn't exist in President Hoover's day: the power of the Fed. Before Depression-era reforms, the Federal Reserve had only limited ability to modulate economic and market swings -- and, indirectly, the political reaction to them. Now, he observes, the Fed has the power to smooth out bumps by making interest-rate cuts. The Fed hasn't cut rates in months, but it still has a bit more maneuvering room to do so if the stock market's slide pulls the economy down with it.
The current market crisis could turn into a much broader economic and political problem, says Sen. Corzine, if the "reverse wealth effect" of declining market investments begins to seriously contract consumer spending. "I don't think we're over the edge," he adds, "but we're on the precipice."
Provisions in bills expected to become law:
* Create government board to oversee corporate audits, discipline auditors
* Limit auditors' consulting work
* Require CEOs, CFOs to certify accuracy of financial reports
* Force CEOs to give up gains from stock options, bonuses based on false reporting
* Fine and imprison executives who lie to SEC
* Make easier criminal prosecution of executives who destroy evidence or defraud investors, and lengthen maximum jail terms
* Require executives to disclose stock sales within two days. Ban personal loans to top executives of public companies
* Require shareholder approval of option plans
* Boost SEC budget 66 percent, to $776 million for fiscal 2003
* Require that they have majority of independent directors
* Make mandatory that audit committee approves auditors, auditor-consulting contracts, 401(k) plans
* Allow workers to diversify 401(k) plans away from company stock holdings after being at a firm for three years
* Require SEC to make rules on analyst conflicts of interest
Source: WSJ research
©2002 Associated Press
What completely bass-ackward revisionist poppycock.
Trade only amounted to 6% of GNP to begin with, and it declined to 2% of GNP by 1932. Furthermore, since Smoot-Hawley only applied to 1/3 of imports, you can't even attribute the 4% drop to the tariff. Rather it was the 31% decline in GNP and 25% unemployment rate that more drasticly reduced demand for imports.
And as far as Smoot-Hawley "causing" the Depression, the stock market crashed in 1929, the tariffs weren't enacted until 1930.
Take your convoluted, revisionist and discredited economic theories and peddle them elsewhere.
Sage comment.
Now as to the "timing," glad you asked. Jude Wanniski has done an extensive study on the market in the months before HS was passed. With every advance of HS through a congressional committee vote, the market went DOWN. But the key vote came on Wed. just before "Black Thursday." This made HS a surety.
The more we find out about this idiotic bill, the more the evidence points to it as being the second greatest factor in the Great Depression, behind the antics of the Federal Reserve board. Put THAT in your pipe and smoke it.
Both Doug Irwin and Mario Crucini, in separate studies, have shown that when you factor in DEflation, HS probably "hit" this country for 5% of GNP!!! This is an incredible shock, and doesn't factor in the "trade wars" and reciprocity barriers that were effected afterwards. I suspect the actual "death toll" for HS is probably higher.
Want to put that in perspective? Most economic historians find that the railroads only ADDED about 5-10% to the GNP in the entire 19th century. So in a couple of years, Hawley Smoot wiped out everything it took the railroads 80 years to add!!!
Who gives a rat's patoot about any "study" that Wanniski does?
He's not an economist.
His education is Political Science and Journalism: the perfect combo for propaganda, not a serious "study" of economics.
Invalid comparison.
The old Soviet Union was void of any market forces whatsoever.
It was strictly a centrally planned "command economy" with all resources owned, controlled and operated by the state.
In contrast, when markets falter due to the pencil-pushing, paper-shuffling excesses of Wall Street, there is nothing wrong with Government "priming the pump" of private industry by building infrastructure that benefits EVERYBODY for decades to come. And I do mean EVERYBODY, private businesses as well as the workers who become their employees. And taxpayers receive tangible and lasting infrastructure for their investment.
Guess that leaves out both Adam Smith (philosophy) and Karl Marx (sociology/philosophy). What's left of your idiot spectrum?
No, just that Mr. Wanniski's "thoughts" are predictably biased and non-objective.
They shouldn't be confused with sound economic theory.
Adam Smith did quite well.
Yet since he predates the development of the modern science of economics, it's hardly a fair comparison.
Karl Marx on the other hand... yeah, I'd say he's just as disreputable as Wanniski.
William Flax Return Of The Gods Web Site
The first reaction of normal people to a real problem is to become more Conservative--to get back to the basics. But if there is no one out there willing to preach the truth to them, they will eventually be misled by the endless repetition of Socialist lies. That has always been the Left's approach--The Big Lie. We need to hit them first with the truth--and we need to persist.
The very worst thing which Conservatives can do at such times is go on the defensive--or start apologizing for our beliefs and system.
We need to make the land ring out with the righteous indignation of a free people sick of politicians gnawing at their vitals for personal advantage.
William Flax Return Of The Gods Web Site
Those aren't "well-respected economists".
Those two are young mush-headed academic wannabes who crank out worthless research papers on global Klintonomics to satisfy the liberal agenda that plagues our universities. "Publish or perish" and your "study" better come up with the correct PC conclusions.
Same crapola junk science that brings us the Kyoto Protocol to solve "global warming".
Here are the facts:
Trade only amounted to 6% of GNP to begin with, and it declined to 2% of GNP by 1932. Furthermore, since Smoot-Hawley only applied to 1/3 of imports, you can't even attribute the 4% drop to the tariff. Rather it was the 31% decline in GNP and 25% unemployment rate that more drasticly reduced demand for imports.
A Google search reveals sufficient background information on the two relatively unknown wannabes you cite. However, the mere fact that you reference them in support of your absurd contentions is enough to condemn their credibility. They eschew valid academic methodology by assuming the politically correct result they desire is "true", then manipulating historical data and facts to support their incompetent assertions.
Senator John Heinz III, who died tragically in a plane crash in 1991, had developed a national reputation for his expertise in international commerce. During his years of serving in Congress, Senator Heinz III was appointed to the Chairmanship of the Subcommittee on International Finance and Monetary Policies. He had this to say about the Smoot-Hawley myth in 1985:
“It gravely concerns me that every time someone in this administration or the Congress gives a speech about a more aggressive trade policy, or the need to confront our trading partners with their subsidies, barriers to imports and other unfair practices, others in Congress immediately react with speeches on the return of the Smoot-Hawley Tariff Act of 1930, and the dark days of blatant protectionism and depression...It seems that for many of us that Smoot-Hawley has become a code word for protectionism and, in turn, a code word for the depression. Yet, when one recalls that Smoot-Hawley was not enacted until more than 8 months after the October, 1929 collapse, it is hard to conceive how it could have led to the Great Depression...the changes supposedly wrought by this single bill in 1930 appear fantastic.”
BTW, the late Senator Heinz entered Harvard Business School in 1961, and the following year worked for the summer with the Union Bank of Switzerland in Geneva. He received his Master's degree in Business Administration from Harvard in 1963. That's sufficient academic background for competent understanding of economics to be authoritive on the subject, unlike your voodoo propagandist Wanniski.
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