Posted on: Monday, August 5, 2002
SECOND OPINION
Market always corrects itself
By Cliff Slater
Greedy investment bankers and stockbrokers cannot make any money unless the mob gets back in the market. For that, the mob will need to believe again.
That some businesspeople are dishonest is nothing new; it is ongoing and continual. Nor is it new that greed on the part of investors leads to speculative manias, which in turn encourage businesspeople to act dishonestly.
The tulip bulb craze in the 1600s, the South Sea Bubble in the 1700s and investor fads for new technologies such as canals, railroads, streetcars and automobiles have all in their time sparked speculative manias — and subsequent crashes. In time, the telecom mania will be seen as one more of them — and it will not be the last.
As one economic historian puts it, "The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom."
Accounting dishonesty? We will later find that only a few companies were guilty of it out of 10,000 public companies listed.
The Wall Street Journal recently itemized 23 companies "whose business practices are being questioned" and the list includes WorldCom and Enron. These accounting frauds will quickly self-correct because investors and stock analysts have been bitten hard and will not likely be bitten the same way twice.
Dishonest auditors? We will likely find that Arthur Andersen had only a few of their partners involved in these scandals out of the thousands of partners they have. For that, they and all their fellow partners, even retired ones, have paid dearly; their pensions are likely worthless along with their ownership of the firm.
This dishonesty by a few will self-correct because even the most junior partners in all the remaining auditing firms will now carefully scrutinize the internal audit procedures — if for no other reason than to protect their pensions and livelihoods.
Outrageously high salaries and monstrous stock options in public companies? These are all disclosed in company filings; if you object to them, don't invest in the companies that have them.
Greedy investors? Those guilty of "irrational exuberance," in Alan Greenspan's treasured phrase, are angry and want to lay blame everywhere but on their own greed.
However, every investment adviser appearing on TV during the 1990s warned us that we should diversify our investments to lessen risk. Some investors ignored that. They were the ones who whined when events happened that they had been warned about time and time again.
The result will be new legislation. Undoubtedly, this will prolong the market's self-correcting actions. The market will always correct itself, despite government meddling, because the incessantly greedy investment bankers and stockbrokers cannot make any money unless the mob gets back in the market.
For that, the mob will have to believe again that the accounting and the auditing of listed companies and analysts' recommendations about them are relatively honest. Therefore, those who profit from the buying and selling of stocks will do whatever is necessary to ensure this happens — that is the way markets works.
But we will get protective legislation anyway, and it will call for more bureaucrats for the SEC. They will then get busy with bureaucratic controls and further hamper the market. As Jefferson warned us, "The natural progress of things is for government to gain ground and liberty to yield."
