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
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.
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.
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
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,