I. A Crisis of Faith
We dont know the right word for what were going through. Were in a financial downturn, a selloff, a slide. As I write, its not a crash, though it could become a crash on any given day. The word panic (at least, as a noun) dropped from our economic lexicon long ago, perhaps because the New Deal made the prospect of panic more remote, perhaps because its a word nobody wants to hear at a time like this. People panicked in the 19th century; no one panics in the 21st. Or do they?
Besides, the effect of the downturn, or the selloff, or the crash, on the real economy is equally murky. Americans continue to shop and to buy -- so far; large-scale layoffs are confined to accounting, high-tech and the miscreant companies that got caught. Are we headed for recession? Is this a valley or an abyss?
But we know the mournful numbers. We know that the Standard & Poors index of 500 stocks has dropped by 45 percent since the market peaked in the spring of 2000. The NASDAQ is worse; its lost 74 percent of its value. And the green-eyeshade guys have totaled this up. Banc of America Securities figures that, as of last week, $6.7 trillion of the value of publicly traded companies in the U.S. has vanished since the downturn began. The friendly folks at Datastream have performed a similar calculation on a worldwide basis, and tell us that the equity value of the planets corporations has declined by $11.3 trillion over the same period. Thats a 35 percent decrease; one-third of the worlds shareholder value has gone poof in the past two years.
So whatever we choose to call this decline, were talking real money. Lots of peoples real money. The percentage of Americans who were in the market in 1929, or even during the brief crash of 87, was minuscule (in 29) or small (in 87) compared to the percentage today, when over half the households in the land have at least some stake in our financial system. The euphoria of boom time created millions of first-time investors, but the rise of the 401(k) plunged employees into the market, too. And 401(k)s were not created by Americas workers. They were a cost-saving device devised by management to hold down the costs of pensions. During the bubble, hardly anybody cared, but now that its burst, millions of Americans may soon realize that they have become capitalists despite themselves.
Theres one term, however, that absolutely can be applied to the current situation: crisis of faith. Ultimately, a major financial downturn is always the result of a crisis of faith. And the chief reason why the current downturn has not yet run its course is that not one but many faiths have been shaken in the past few months.
The first is the faith in current stock values. You dont have to be the least bit panicky to conclude that stocks are still overvalued. The boom of the 90s saw all the laws of valuation broken; stock prices soared to many times the historic mean for price-earnings ratios. In the dot-com sector, the companies with the most highly priced stocks often had no earnings at all. Valuation was essentially a reflection of faith in the future, which was particularly propagated by brokerage- and investment-house analysts who made out like bandits when the stocks rose. Greed touted these stocks; faith sustained them. Today, in the mornings gray light, investors may note that the current price-to-earnings ratio of the Standard & Poors 500 is still three times higher than its historic average -- a grim realization when your faith in the future has crumpled. The coyote, remember, can run through midair only until he realizes theres nothing beneath him. Thats when he crashes to earth.
Were this faith in stock futures the only faith to be shattered, the fall would be serious enough. But the myth of the wealth-creating CEO, that hero of 90s culture, has also been dispelled -- making the fall all the longer. Just yesterday, CEOs were hailed as new-economy entrepreneurs (Bill Gates, Jeff Bezos) or as innovators within the old economy (Jack Welch). Today, old or new, the men who run the system have been rudely downgraded. In a CBS poll of July 11, fully 67 percent of Americans said that most corporate executives -- thats most, not some -- are dishonest. (Indeed, the op-ed pages of the past two weeks have been filled with the yelps of wounded CEOs, defending not just their honesty but their redeeming social importance. This would be almost bearable if the thievery of the Ken Lays and the Bernie Ebberses were the only problem. The real problem, of course, is that the ratio of CEO pay to that of his or her employees has expanded astronomically. In 1980, the average CEO made 42 times as much as the average blue-collar worker. In 1990, the figure climbed to 85 times as much, and by 2000, CEO take-home pay was a cool 531 times more. Simple decency demands that, having taken the money, Americas CEOs should now shut the hell up.)