Tuesday, September 16, 2008

Where Have All the Flowers Gone?

The news of Wall Street’s meltdown today and yesterday has me flashing back to the winter of 2000-2001 when the economy fell apart as the tech boom turned into a tech bust. Eight years ago I was in the middle of my senior year of college and, as companies’ fortunes soured overnight I, as well as many of my classmates, had job offers withdrawn or postponed indefinitely, replaced by huge question marks hanging over our heads as we approached graduation. (His appearance had nothing to do with the economy, but in an interesting twist, John McCain was my college graduation speaker). Today – fortunately – I’m lucky to have a secure job, though I’m witnessing more and more friends being caught in the economic downturn.

I realize that there are significant differences between now and eight years ago. Perhaps most importantly, the causes of the two sudden economic collapses are vastly different. In 2000, the market went belly up after Wall Street investors realized that the dime-a-dozen startup Internet companies they had been pouring their dollars into were projecting success based on intangible website traffic instead of revenue dollars. That revelation was the equivalent of finding out that the real estate investors had purchased to build their homes on was merely a cloud in the sky that had just disappeared into thin air. (The movie Startup.com provides an entertaining and compelling anecdotal portrayal of this phenomenon). While today’s collapse is also rooted in fundamental economic misperceptions, they are of a different, and perhaps more complicated, sort. Today’s collapse originated in the debt markets – with lenders deciding to provide a massive number of high-risk mortgages that ultimately went into default, and with investment banks taking on too much debt and making too many risky investments. Moreover, whereas the tech bust was preceded by “irrational exuberance” (a phrase famously coined by Alan Greenspan, the man who’s policies laid the groundwork for today’s collapse), since the tech bust in 2000-2001, the economy has muddled somewhere between mediocre and fair condition.

The media has focused much of its attention on the effect that Wall Street’s meltdown will have on the presidential race. From my perspective both candidates were caught sleeping at the wheel yesterday morning; not because they haven’t talked about the sinking economy before today, but because they’ve been tailoring their positions and remarks only to the blue collar workers who have been affected by the softening economy, without addressing the possibility of massive unemployment among white collar workers as well. On the other hand, if we take a hard look at the electoral map, most of the swing states (e.g., Ohio, Pennsylvania, Michigan) have substantial blue collar workers, whereas the states that will be hardest hit by the collapse/acquisitions of Bear Stearns, Lehman, Merrill Lynch, and AIG (most notably New York and California) are already pretty much foregone conclusions on the electoral map and therefore don’t need as much political attention from the candidates.

Presidential race aside, it’s certainly frustrating to be witnessing the collapse of investment banks that managed to survive the Great Depression but are now finding it more difficult to get through the next 24 hours. Having made it through the turmoil of eight years ago, and having seen my college friends all land on their feet after that period of uncertainty, I’m hopeful that ten years from now all the workers who have been affected by the collapse will be able to say that they weathered the storm. Until that day arrives, however, the number crunchers, policy makers and dollar spenders deserve their fair share of the blame in failing to address a storm that has been brewing on the horizon for years now.

Even after the tech bust, the White House has advocated free corporate rein without engaging Congress and considering how to use regulation to enhance corporate accountability and monitor risk. (Sarbanes-Oxley, passed in 2001, was a step in the right direction but that act focused more on ensuring that public companies issued truthful financial statements instead of measuring the risk levels that financial institutions have assumed). Investment banks should have done their soul searching eight years ago to better figure out how to mitigate risky investments so that their gambles wouldn't turn up sour again. Without any changes made, either in terms of regulation or corporate practices, the incentive to generate short term profits that drove investment banks to sink funds into technology start ups simply hasn't gone away. Peter, Paul and Mary's song "Where Have All the Flowers Gone?" has a refrain that won't get out of my head: “O’, when will they ever learn, when will they ever learn?”