The Old Order Trembles
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.
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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.)
As with the CEOs, so with their institutions. In the same CBS poll, just 6 percent of the public has a lot of confidence in big business -- the lowest level recorded since pollsters began asking this question in 1986, according to public-opinion analyst Ruy Teixeira, from whose weekly Public Opinion Watch I take these figures. Likewise, in a Gallup poll released July 10, 38 percent responded that business, not government, was the biggest threat to the nation -- the highest threat reading for big business, writes Teixeira, since pollsters started asking this question way back in 1965.
And no wonder. What Americans have learned in the past half-year is that CEOs, corporate boards, accounting firms and investment analysts have no incentive to accurately depict the condition of a corporation; indeed, they often have considerable incentive to distort it. And when investors, in the midst of a selloff, discover they cannot get any reliable information on companies earnings or profits -- well, if that isnt a prescription for a panic (shh! not that word!), I dont know what is.
II. A Political Earthquake (Maybe)
In this fetid Washington summer, that new stink in the air is the smell of Republican fear. Over the past couple of weeks, one Democratic member of Congress says of the two parties, We [the Democrats] see an opportunity -- at last -- but you cant say were feeling confident. But theyre scared shitless.
Just how shitless remains to be seen. The GOP House leadership will have to decide this week whether to accede to the Senate Democrats bill that splits accounting firms into separate auditing and consulting components, or to hold out for a weaker version that is truer to their laissez-faire ideology and big-time contributors. In the end, theyll probably have to go along; ones choices in midlandslide are limited. But the reluctance of congressional Republicans to clean up business is as nothing next to the reluctance of the administration. By all appearances, no one in Bushland really wants to restructure accounting, or crack down on CEOs, or make companies report (and thus reduce) their executive stock options. In the face of a falling market, the failure of the president to advocate the minimal reforms required to reassure investors is mind-boggling. That is, until you realize what specific wing of capitalism the Bush administration represents.
For, above all else, this is the CEO administration. Dick Cheney was CEO of Halliburton; Treasury Secretary Paul ONeill of Alcoa; Commerce Secretary (and W.s best friend) Don Evans of Tom Brown, an oil company; Defense demigod Don Rumsfeld of G.D. Searle and General Instrument and chairman of Gilead Sciences. And W. himself was the CEO (Ceremonial Events Officer) of the Texas Rangers. And theres the problem -- for no group in American society more values solidarity than its CEOs. They are forever placing their fellow CEOs on their boards of directors, with the assurance that their counterparts will support the most outlandish executive pay packages, and in the knowledge that they themselves will be appointed to other corporate boards for exactly the same purpose. The concerns of investors are all well and good, then, but the Bushmen must be loyal to their lodge.
Congressional Republicans must be thrilled to realize that W. is more concerned with the care and feeding of CEOs than he is with ensuring their own re-election. The GOP is already in trouble because of the great selloff: In a CBS--New York Times poll of July 18, 42 percent of participants thought the country was on the right track, while 48 percent said it was on the wrong -- gloomy numbers for the party in the White House. Worse, the Harken and Halliburton scandals have combined with the publics pre-existing sense of who Bush is and whom he represents to create an image of his administration that should terrify Republicans aeverywhere. As to the president himself, according to the Times poll, respondents split 42 percent to 42 percent when asked whether Bush was more interested in protecting the interests of ordinary Americans or large corporations. Fifty percent said Bush was looking out for large corporations in his accounting reforms; just 37 percent said he was looking out for the average fella. And when asked whether members of the administration sided with large corporations or ordinary Americans, 61 percent said corporations, while only 27 percent said just plain folks.
In short, the American people clearly understand what the Bush administration is about. This is a boon for the Democrats; they must only hope that the American people dont fully grasp what they are about. On the whole, the Democrats have performed admirably in promoting important, if limited, reforms of accounting, and in increasing the penalties for wayward corporate honchos. But if Bush has sided with CEOs over investors on virtually everything, the Democrats last week also sided with CEOs over investors on one crucial question: expensing stock options.
As CEOs tell it, rewarding executives and employees with stock options makes them all busy beavers bent solely on increasing their companys value. While stocks were booming, most investors happily went along with this notion; the rising tide lifted their boats alongside Larry Ellisons floating island. But with stocks going south, and with the abuses of the Fastows and the Lays now public knowledge, investors have discovered that their relationship to CEOs can be just as adversarial as the workers. To begin with, despite the CEOs claims that options are widely distributed, a study from the National Center for Employee Ownership shows quite the opposite: that 75 percent of all options distributed in 2000 went to the top five officers of corporations. And by rewarding themselves with more options, the top executives dilute the value of the shares that investors hold. They engage in short-term deals that boost stock prices in time for option-cashing season, though these deals may contain ticking time bombs for their company a few years hence. Options reward the bright and dim alike; they enrich do-nothing executives who preside over companies during bubbles and booms, when every stock rises. (Dumb-luck CEOs who claim they merit such rewards are as roosters who take credit for the sunrise.) And by not posting these options as expenses in their annual reports, CEOs make it impossible to discern the real amount of their companys profits -- and the real value of its stock. By not expensing options, a number of studies have concluded, the reported profits of your average option-issuing company have been overstated by about 10 percent in recent years. In high-tech companies, which compensated for their original inability to pay good wages by issuing oodles of options to their execs, the overstatements have been far higher. According to the Bear Stearns investment house, if Cisco Systems had expensed its options in 1999-2000, its profits would have declined from $4.6 billion to $2.7 billion.
So outing options should have been a no-brainer for those populist Democrats. Instead, it was a nonstarter. High-tech, after all, is a major source of Democratic campaign contributions; other than entertainment, it is the only major industry that gives the Democrats more money than the Republicans. In the 2000 election, according to the Center for Responsive Politics, Silicon Valley gave the Democrats $20.7 million, and covered their bets by forking over $18.5 million to the Reeps. This is no accident; the techie-Democrat alliance has been cultivated by Democratic pols ever since Gary Harts 1984 presidential campaign. Nor is it merely the result of countless quid pro quos. Like Hollywood, Silicon Valley shares the Democrats feminism and cultural liberalism; like Hollywood, Silicon Valley is too young and cool to be comfortable around Republicans -- something the Democrats never let them forget.
Investors, alas, hold no such sway over the Democrats. They are too diffuse to constitute a funding base, and they have no distinct affinity for the partys cultural liberalism. So when the Pooh-Bahs of Silicon Valley (led by such longtime Democratic money men as John Doerr) told the Democrats to leave their options alone, the Democrats immediately obliged. Senate Majority Leader Tom Daschle killed an effort by John McCain to require option expensing, and he punted into the indefinite future a bill by fellow Democrat Carl Levin to direct the new Federal Accounting Standards Board to come up with such a plan. Given a priceless opportunity to stand up for Main Street, the Democrats stood up for the executive suite instead.
III. One Order Passeth . . .
Despite the Democrats best efforts to squander their advantage in the coming election, the Republicans still have reason to fear that the political ground is shifting beneath their feet. Their problem is not just the stench of dirty deals that have already rendered Dick Cheney hors de combat, and left the president even more incoherent than usual. Its not just the publics understanding that cronyism and preference for the rich are the very purpose of the Bush administration. Its not even Americans growing disenchantment with business, and with the carte blanche treatment the Bush White House accords it. The change in public opinion may be deeper than all that, and more perilous to the GOP.
In fact, we seem to be nearing the end of an entire era in American politics and ideology. The age of market extremism, as Kevin Phillips calls it, that began when Ronald Reagan came to Washington in 1980, no longer seems sustainable. The faith defining that age, which insisted that government was the problem and markets the solution, has run its course. The party that championed that faith is retreating in confusion.
None of this means that the other side -- the party of the mixed economy, of public purposes and social provision, of a sovereign people rather than the almighty dollar -- is in very good shape. That party atrophied during the age of laissez faire: Labor grew weaker even within the Democratic Party; progressive state and local governments dwindled to a precious few; liberals took refuge in less fundamental causes, some in niche issues and identity politics. Whether the Democrats are ready or not, though, a crisis of faith is toppling the old order. And until liberals can formulate their own faith and solidify their ranks, the new one will remain stubbornly unborn.