In Markets We Trust? Check Your 401(k) First!

Here we are again, but different. The last big downturn in

business featured overbuilt commercial and residential development,

savings-and-loan associations lending untold billions for unsound real-estate

projects, rabid interest-rate games and a crashed stock market.

This time around, real

estate is holding up, and we’re told consumer spending is also doing O.K.,

which it is and it isn’t. Car sales have been staying rather brisk, but only

when prices are cut to the point that the car companies aren’t making any

money. The consumers who are spending are doing it at Wal-Mart and Costco, the

discount chains. Go up a couple of notches in retail and they’re singing the

blues, which tells you that a lot of people are worried about parting with

their bucks.

The talking heads keep saying

this isn’t your parents’ recession, if it is a recession at all-and then they

add the definitional quibbles over what a recession is. This time, the

triggering mechanism has been the dot-com nonsense and the overexpansion of the

telecoms. It’s estimated that the loss to holders of telecom stock is in the

vicinity of $2 trillion (that’s trillion ,

with a T). The losses to banks and others who lent

telecoms money to expand will be billions more. With this has come a drumbeat

of announcements from Corning,

Nortel, Lucent and JDS Uniphase of tens of thousands of layoffs, the aggregate

number of which is working out to be much larger than the 134,000 dot-com jobs

that no longer exist. With all that comes the warehouses

groaning with unsold telecom equipment.

So we have a classic

inventory glut, of the sort that’s been visited on the United States periodically ever since the railroad

overexpansion of 1837. The existence of a monumental inventory glut is odd and

unexpected, because for the last decade we’ve been told that electronic

information systems have put an end to manufacturing more than you can sell.

Never again would inventory pileups cause trouble: This happy fact was

advertised as one of the blessings of the e-Age.

But new turned out to be old, and the

lessons to be learned were lessons that businesspeople were supposed to have

learned the last time and the time before that. So it’s turned out that

no machine-even an electronic one that can make 40 million calculations every

half a nanosecond-is a substitute for good judgment and simple business


No computer now offered for sale can save a company if it’s

going to kid itself (and its auditors) by lending money to its own

hyperventilating, insolvent customers to buy its own merchandise, which is what

the fiber-optics industry did. So their warehouses are full and their pockets

are empty, and it’s anybody’s guess what will be the final issue.

And it’s anybody else’s

guess about the future of the dollar. It costs so much to buy with foreign

currencies that a dive in its price might constitute the pricking of the

largest, most damaging bubble yet. It’s like one of those purple blobs in a

science-fiction horror film sitting out in somebody’s field looking inviting,

mysterious and menacing, all at the same time. “The strong dollar is frankly

destroying the manufacturing capability and the manufacturing competitiveness

of this country,” quoth John M. Devine, the chief financial officer of General

Motors, whose company-like every other American company selling abroad-is being

killed by the exchange rate.

If the dollar is spooked

and bolts southward, inflation, zooming interest rates and financial chaos are

predicted. But, as ever, there are the moderates, who’d like to see the dollar

brought down-not too little and not too much-to the right level, whatever level

that might be. They’re crawling around on their tummies in the farmer’s field,

looking to expel just some of whatever’s holding the big blob up. But once it’s

punctured, whatever’s inside the blob may coming

streaming out with an uncontrollable whoosh. Nobody knows; no one’s predictions

are better than the next expert’s.

Everybody’s guessing

about everything. Have we seen the end of the major business disasters, and

thus do we squeak through and return to a national life of preposterously antic

prosperity, in which we get everything we want and little enough of what we

need? Will the road warriors, grounded by meager profits and falling stock

prices, take off again? Is it back to collecting frequent-flyer miles to board

planes that are less likely to be airborne than the infectious disease flying

around their fetid cabins-those tardy, pestilential airliners where you sit and

get blood clots as disagreeable attendants serve spoiled, unrefrigerated food?

Those are the good times, let me please remind you, when we’re flying high and

the order books are full.

A few months of the

doldrums and then back to normal again? The other day, a bank in Chicago failed. It had made its money by lending to lousy

credit risks, or what those who make their livings by euphemism call “subprime

borrowers.” Superior Bank F.S.B. was controlled by Alvin Dworman, a New York developer big into hotels, and the Pritzkers, a Chicago bunch also big into hotels. Superior’s collapse is expected to cost the federal

government a mere half-billion, but not Mr. Dworman and not the Pritzkers, who

are suspected of paying dividends from the bank into the holding company that

owns the bank. They, naturally, own the holding company, which isn’t responsible

for the losses run up by the bank’s management. As I read the story, Mr.

Dworman gets the money and the Federal Deposit Insurance Corporation gets to

hold the bag. That’s not looting; that’s legal, that’s O.K., and anybody who

does it should be up for one of those civic awards they give for having vision

and being bold and all that other good stuff which they say about anybody with

a billion bucks.

Superior isn’t

the only institution that’s been cleaning up by lending money at high interest

rates to bum credit risks. For the last 10 years, credit-card companies, banks,

everybody you can name in the lending business has been bottom-fishing for

subprime borrowers. So is the Dworman-Pritzker caper the first of many? Are we

going to get a series of announcements of other failing banks? Some other

subprime lenders have been a little smarter and a little less greedy than the

Dworman-Pritzker gang and have repackaged and resold these loans in the form of

bonds to-well, whom? If they go bad, we’ll start hearing screams and moans and

then we’ll know whom-and let’s hope it’s not your mutual fund. Stay tuned to

the business channel for updates.

In the midst of so much

happy news, President Bush and his confederates are pushing their plan to give

people the chance to use their Social Security money in private trading

accounts. They would be free, for example, to invest their retirement money in

institutions like Superior Bank. The latest figures about what’s happening with

401(k) retirement accounts suggests that a lot of people would invest in places

like Superior if given a chance. The 401(k)’s, of course, have

replaced the guaranteed pension programs, which were once one of the major

emoluments that went with working for a big corporation.

The 401(k)’s are a lab

experiment for what might happen to the money if people had private Social

Security trading accounts, which they could control as the owners of 401(k)

accounts can. The record indicates that if there’s a raging bull market, the

owners do well; otherwise, forget about it. Most recent figures show that in

the last year or so, these accounts have lost an average of around $5,000. For

amateur stock- or mutual-fund-pickers, anything less than a galloping

bull market means losing retirement-fund money.

Our formidable Federal

Reserve Board chairman has been moving heaven and earth to give stock-market

prices a kick in the sides and a giddyap, thus far

with scant success. Maybe the way to get the market up and moving again is

private Social Security accounts. All those billions and billions of dollars in

new money ought to do it, at least for a while-and if the whole thing has a

slight Ponzi-like odor, put a clothespin on your nose.

In these parlous times,

some say that all these people with their new private accounts should not be

making their own stock picks, but should rely instead on competent investment

advice such as is offered by the great, respected, old-line firms like Morgan

Stanley Dean Witter. You may have other ideas about white-shoe brokers after reading

Gretchen Morgenson’s piece in The New

York Times describing what happened to John Teeples when he took his life

savings of $700,000 to Morgan Stanley to manage. Within 16 months, his account

had shrunk to $403.95. One is tempted to say that Morgan Stanley and its

brokers made out like bandits, but be assured that the profits made at Mr.

Teeples’ expense were not bandit profits, but profits earned by handling the

account in the most ethical and professional manner.

Even if Mr. Teeples had

not made the mistake of going to such a high-minded, honestly run, widely

respected and competently conducted brokerage as Morgan Stanley, he might have

lost his savings anyway. He might have entrusted them to some crooked

broker-the dishonest type who would’ve had no compunction about leaving him

with less than $403.95. He could’ve had all his money stolen.

But let’s get beyond

tsk-tsking about honesty and get to the fundamentals. Life is a risk, and never

more so than life in the United States, where we believe in sink-or-swim, where we get

off on battling the waves alone, single heads bobbing on stormy seas under gray

skies. And if we get a snoot full of salt water from time to time, most of us

don’t drown-we go on dodging the waves and leaping up out of them to see if

there might be a government Coast Guard cutter on the horizon. It’s the

business cycle, and we love it; it’s individualism,

and we love it, too. We live in the richest country on earth, right along with

the Dwormans and Pritzkers, and that makes us feel good. That’s democracy and

the free market and capitalism, and if we’re not running around on a level playing field, we can hope that soon

we’ll be doing the doggy paddle on a calm,

flat sea. In Markets We Trust? Check Your 401(k) First!