While Bill Clinton and Madeleine Albright keep watch on the Tigris and Euphrates, their increasingly worried countrymen watch the markets. Nowhere is the watch kept with more anxiety than here in this city, where Wall Street has moved from being one of New York’s industries to being the city’s make-or-break business. Outside of stocks and bonds, there has been almost no job growth here for years. If the markets go blub, New York goes blub-blub. There are no life preservers should this island spring a leak on Wall Street. There is no Plan B.
Hence the dizzying dives and hilarious climbs of these last weeks have hammered home the affinity between Gothamites and the people who live at the base of Mount Fuji in a land where financial matters are already in tatters. We’re all volcanologists now, treading softly and listening for rumbles.
People who live under eruptive mountains or in notorious flood plains or on geologic faults have their rituals calculated to give themselves a little peace of mind. The stockbrokers have taught us to banish fear of the future by having us repeat to ourselves that you don’t have to worry about a crash if you’re not a speculator and are in the market for the long term.
The saying goes that the sensible, honnête bourgeois, who adds methodically to his or her 401(k) or I.R.A. month after month, knows he will be rewarded by the god Fiscus, who protects all stock exchanges, gaming houses and sacred groves where chemin de fer is played. It’s only those beastly traders who quick-buy and fast-sell who get caught if there’s a crash. Long-haulers, though, have nothing to worry about. As the stock peddlers explain to us in their advertisements, in the long run, the market always goes up. And you can take that to the bank, buddy.
So not to worry about crashes. Only fasten your seats, ladies and gentlemen, and the volatility, to use the word in fashion just now, won’t send you crashing through the cellar and into the poorhouse.
There is something to this happy talk. Regardless of which party is in power, the Government appears committed to preventing or at least ameliorating cataclysmic financial events. Going back to the panic of 1907, various administrations have moved ever more nakedly to stop big crashes of one sort or another. In our own time, we have seen Washington commit gigantic amounts of money to save institutions deemed “too big to fail,” i.e., the Chrysler Corporation, the Mexican peso, Conrail Inc., the Bank of Philadelphia, the Continental Illinois National Bank and Trust Company of Chicago, the savings and loan industry and the stock market itself in 1987.
Whether some of these rescue efforts succeed or merely delay or deflect the blow is not known. For example, what part-if any-did the savings and loan bailout, executed at a cost thought to exceed half a trillion dollars, play in the recession of the early 1990’s? Is it true that the tricks and sleight of hand performed by the Japanese Government to prop up its big banks and the Tokyo stock market have put the country into what seems to be a near-permanent low-grade recession?
But stock markets not only crash, they are subject to slow wasting disorders. What happens to the savings and retirement plans of our middle class if the market doesn’t crash and, instead, does a gradual swoon, then a revival, then another swoon, and on and on? That is essentially what happened to the American stock market in the 1970’s. Robert Sobel, a professor of business history at Hofstra University, has nicely recapitulated this sorry tale:
“Wall Street’s mood was positively euphoric on Friday, Nov. 29, 1968, when the Dow reached 985, up nine points for the session and 18 for the week … It appeared that 1,000 would be surpassed before the end of the year … The Fed raised the discount rate on Dec. 18 … A week later, the Dow industrials were at 953. No longer was there talk of Dow 1,000 … On May 26, 1970, after some $300 billion in market value had evaporated, the Dow finally found support at 631. Then there was a rally, which took the benchmark average above the 1,000 mark in early 1973, but there was no joy in it, and selling soon began-and then accelerated … Stocks staggered to 570 in late 1974, losing close to half their value in less than two years. It had been the worst bear market since the 1930’s. Market values had fallen more than 40 percent since their 1968 highs … Then came the bounce back; by autumn 1976, the average was at 1026. But the upward trend didn’t hold, and the market reverted to an unpleasant down-and-up pattern that eventually left it reeling again. A low of 736 in early 1978, a high of 917 by late summer of the year, and after some more ricocheting, 759 in April 1980.”
Imagine attempting to time your retirement or your child’s college education or your gallbladder operation so you can pull the needed funds out on the days when they exist and are there for you. Happily, all of that took place before working America put trillions of dollars and its entire financial future into the markets. What form might the social and political mayhem take if the next 10 or 12 years were to be some sort of a rerun of the 1970’s?
Unlike a crash, which is a discrete, recognizable financial event, the swoon arrives unrecognized. In the face of a crisis such as a crash, the Government has a precedent for action and a plan derived from what it has done in the past; in the face of a swoon, the Government has no plan. Unlike a crisis, when it is obvious that something must be done, a swoon sneaks up on the country, coming in such a way that there never is a crisis point, a moment when it is suddenly plain to all that the emergency is here and steps must be taken. A crash invites action, a swoon invites standing around arguing whether something should be done, and then more arguing about what it might be.
To make havoc out of the futures of people who hope to retire in the next 10 or 15 years, the markets don’t even have to swoon. All they have to do is go flat. Then stock prices won’t rise, but they won’t fall, either. Should this happen over an extended period of time, not a few million people will have to revise their career plans and think about working until age 72 or so.
In the fiendishly idiotic way things are set up, people’s retirement nest eggs depend on the price of the stocks going up, not on the dividends the stocks throw off. The dividends are pathetically small if figured as a return on the price of a share of stock. Without growth in the price of stocks, a person would come out ahead putting his or her money in low-interest Government notes and bonds, the value of which will not vaporize because some Wall Street knave has pulled the wool over the eyes of your mutual fund manager.
Those same managers charge so much in fees for their questionable services that they sop up all but a sliver of the dividends paid to the mutual funds containing America’s life savings. Jack Bogle, chairman of one of the largest mutual funds, the Vanguard Group, points out that the average fee these funds charge is 1.5 percent, while the average dividend of a representative group of stocks (the companies in the Standard & Poor’s 500 index) is 1.7 percent. So you may expect that, in a flat market, your retirement account will grow at the rate of about two-tenths of 1 percent per year. Needless to say, that will not get you a pleasantly situated condo in warm climes. It may, however, make you eligible for food stamps. And they say Social Security is dicey.